Systemax Inc (NYSE:SYX), 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 SYX will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will take you through a few basic checks to assess the financial health of companies with no debt.
Is SYX right in choosing 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 SYX’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 SYX is a high-growth company. SYX’s revenue growth in the teens of 14% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If SYX is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SYX meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Systemax 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. With current liabilities at US$255m, it appears that the company has been able to meet these commitments with a current assets level of US$419m, leading to a 1.64x current account ratio. For Trade Distributors companies, this ratio is within a sensible range since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
As a high-growth company, it may be beneficial for SYX to have some financial flexibility, hence zero-debt. Since there is also no concerns around SYX’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. I admit this is a fairly basic analysis for SYX’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Systemax to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for SYX’s future growth? Take a look at our free research report of analyst consensus for SYX’s outlook.
- Valuation: What is SYX 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 SYX 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 email@example.com.