The direct benefit for Supportcom Inc (NASDAQ:SPRT), 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 SPRT will have to adhere to stricter debt covenants and have less financial flexibility. While SPRT has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess SPRT’s financial health.
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. SPRT’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. SPRT’s revenue growth in the teens of 11% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If SPRT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SPRT pay its short-term liabilities?
Since Support.com 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$7m, it seems that the business has been able to meet these obligations given the level of current assets of US$62m, with a current ratio of 9.35x. Having said that, many consider anything above 3x to be quite high.
Having no debt on the books means SPRT has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around SPRT’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, SPRT’s financial situation may change. This is only a rough assessment of financial health, and I’m sure SPRT has company-specific issues impacting its capital structure decisions. I recommend you continue to research Support.com to get a better picture of the stock by looking at:
- Historical Performance: What has SPRT’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.
- 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.
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