Taylor Devices Inc (NASDAQ:TAYD), 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 TAYD 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 TAYD growing fast enough to value financial flexibility over 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. TAYD’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. TAYD delivered a negative revenue growth of -4.7%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can TAYD meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Taylor Devices 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. Looking at TAYD’s most recent US$7.0m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.35x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue TAYD could be holding too much capital in a low-return investment environment.
Having no debt on the books means TAYD has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around TAYD’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, TAYD’s financial situation may change. I admit this is a fairly basic analysis for TAYD’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Taylor Devices to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TAYD’s future growth? Take a look at our free research report of analyst consensus for TAYD’s outlook.
- Valuation: What is TAYD 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 TAYD 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.