Is SPS Commerce Inc’s (NASDAQ:SPSC) Liquidity As Good As Its Solvency?
SPS Commerce Inc (NASDAQ:SPSC), 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 SPSC 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 SPSC has outstanding 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. View our latest analysis for SPS Commerce
Does SPSC’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 SPSC’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 SPSC is a high-growth company. SPSC’s revenue growth over the past year is a double-digit 21.94% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does SPSC’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, SPS Commerce 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. With current liabilities at $32.2M liabilities, the company has been able to meet these commitments with a current assets level of $185.9M, leading to a 5.78x current account ratio. Though, anything about 3x may be excessive, since SPSC may be leaving too much capital in low-earning investments.
Next Steps:
Are you a shareholder? Given that SPS Commerce is a relatively low-growth company, having no debt on its balance sheet isn’t necessarily the best thing. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. I suggest you take a look into a future growth analysis to account for what the market expects for the company moving forward.
Are you a potential investor? In terms of meeting is short term obligations, there’s nothing to worry about for SPSC. Though, a relatively low revenue growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. Keep in mind I haven’t considered other factors such as how SPSC has been performing in the past. For your next step, you should take a look at SPSC’s past performance in order to determine for yourself whether its zero-debt position is justified.
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.
