Q2 Holdings Inc (NYSE:QTWO): Financial Strength Analysis
The direct benefit for Q2 Holdings Inc (NYSE:QTWO), 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 QTWO will have to adhere to stricter debt covenants and have less financial flexibility. While QTWO has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status. See our latest analysis for Q2 Holdings
Is financial flexibility worth the 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. QTWO’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. QTWO’s revenue growth over the past year is a double-digit 37.99% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can QTWO meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Q2 Holdings has no solvency issues, which is 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. At the current liabilities level of US$59.21M liabilities, the company has been able to meet these obligations given the level of current assets of US$125.67M, with a current ratio of 2.12x. Generally, for Internet companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
As a high-growth company, it may be beneficial for QTWO to have some financial flexibility, hence zero-debt. Since there is also no concerns around QTWO’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure QTWO has company-specific issues impacting its capital structure decisions. I recommend you continue to research Q2 Holdings to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for QTWO’s future growth? Take a look at our free research report of analyst consensus for QTWO’s outlook.
2. Valuation: What is QTWO 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 QTWO is currently mispriced by the market.
3. 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 pass 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.
