Is RELM Wireless Corporation (NYSEMKT:RWC) As Financially Strong As Its Balance Sheet Indicates?
The direct benefit for RELM Wireless Corporation (AMEX:RWC), 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 RWC will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean RWC has outstanding financial strength. I recommend you look at the following hurdles to assess RWC’s financial health. View our latest analysis for RELM Wireless
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. RWC’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. RWC delivered a strikingly high revenue growth of 70.54% 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 RWC pay its short-term liabilities?
Given zero long-term debt on its balance sheet, RELM Wireless has no solvency issues, which is 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. Looking at RWC’s most recent $6.4M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $29.8M, leading to a 4.68x current account ratio. Though, anything about 3x may be excessive, since RWC may be leaving too much capital in low-earning investments.
Next Steps:
RWC’s soft top-line growth means having no debt on its balance sheet isn’t necessarily the best thing. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. This is only a rough assessment of financial health, and I’m sure RWC has company-specific issues impacting its capital structure decisions. I recommend you continue to research RELM Wireless to get a more holistic view of the stock by looking at:
1. Valuation: What is RWC 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 RWC is currently mispriced by the market.
2. Historical Performance: What has RWC’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.
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.
