REGENXBIO Inc. (NASDAQ:RGNX), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is RGNX will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean RGNX has outstanding financial strength. I recommend you look at the following hurdles to assess RGNX’s financial health.
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Is RGNX right in choosing financial flexibility over 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. The lack of debt on RGNX’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if RGNX is a high-growth company. RGNX delivered a strikingly high triple-digit revenue growth over the past year, 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 RGNX pay its short-term liabilities?
Since REGENXBIO 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. With current liabilities at US$19m, it seems that the business has been able to meet these commitments with a current assets level of US$386m, leading to a 20.21x current account ratio. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
Having no debt on the books means RGNX has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around RGNX’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure RGNX has company-specific issues impacting its capital structure decisions. I recommend you continue to research REGENXBIO to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for RGNX’s future growth? Take a look at our free research report of analyst consensus for RGNX’s outlook.
- Valuation: What is RGNX 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 RGNX 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 firstname.lastname@example.org.