The direct benefit for Technical Communications Corporation (NASDAQ:TCCO), 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 TCCO will have to adhere to stricter debt covenants and have less financial flexibility. While TCCO has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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. See our latest analysis for TCCO
Is TCCO growing fast enough to value financial flexibility over 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. TCCO’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. Opposite to the high growth we were expecting, TCCO’s negative revenue growth of -57.54% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can TCCO pay its short-term liabilities?
Since Technical Communications 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. Looking at TCCO’s most recent $0.6M liabilities, it appears that the company has been able to meet these commitments with a current assets level of $4.9M, leading to a 8.89x current account ratio. However, anything about 3x may be excessive, since TCCO may be leaving too much capital in low-earning investments.
Are you a shareholder? Given that Technical Communications is a relatively low-growth company, not taking advantage of lower cost debt may not be the best strategy. As shareholders, you should try and determine whether this strategy is justified for TCCO, and whether the company needs financial flexibility at this point in time. You should take a look into a future growth analysis to examine what the market expects for the company moving forward.
Are you a potential investor? TCCO’s management of short term liabilities is strong. But, a relatively low revenue growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. Keep in mind I haven’t considered other factors such as how TCCO has been performing in the past. You should continue your analysis by taking a look at TCCO’s past performance to figure out TCCO’s financial health position.
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The author is an independent contributor and at the time of publication had no position in the stocks mentioned.