Is Patriot Transportation Holding Inc’s (NASDAQ:PATI) Balance Sheet Strong Enough To Weather A Storm?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Patriot Transportation Holding Inc (NASDAQ:PATI), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess PATI’s financial health.
Check out our latest analysis for Patriot Transportation Holding
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. PATI’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. Opposite to the high growth we were expecting, PATI’s negative revenue growth of -1.3% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can PATI pay its short-term liabilities?
Since Patriot Transportation Holding 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. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. At the current liabilities level of US$8m liabilities, the company has been able to meet these commitments with a current assets level of US$29m, leading to a 3.49x current account ratio. However, many consider anything above 3x to be quite high and could mean that PATI has too much idle capital in low-earning investments.
Next Steps:
Having no debt on the books means PATI has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how PATI has been performing in the past. I recommend you continue to research Patriot Transportation Holding to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for PATI’s future growth? Take a look at our free research report of analyst consensus for PATI’s outlook.
Valuation: What is PATI worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether PATI is currently mispriced by the market.
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 editorial-team@simplywallst.com.
