The direct benefit for Organovo Holdings Inc (NASDAQ:ONVO), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is ONVO will have to adhere to stricter debt covenants and have less financial flexibility. While ONVO has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ONVO’s financial health.
Is ONVO right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either ONVO does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. ONVO delivered a negative revenue growth of -0.6%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does ONVO’s liquid assets cover its short-term commitments?
Since Organovo Holdings doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. Looking at ONVO’s most recent US$3.2m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$42.3m, with a current ratio of 13.18x. Though, anything about 3x may be excessive, since ONVO may be leaving too much capital in low-earning investments.
Having no debt on the books means ONVO has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ONVO’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, ONVO’s financial situation may change. This is only a rough assessment of financial health, and I’m sure ONVO has company-specific issues impacting its capital structure decisions. I suggest you continue to research Organovo Holdings to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ONVO’s future growth? Take a look at our free research report of analyst consensus for ONVO’s outlook.
- Historical Performance: What has ONVO’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.