Zero-debt allows substantial financial flexibility, especially for small-cap companies like Tetraphase Pharmaceuticals Inc (NASDAQ:TTPH), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean TTPH has outstanding financial strength. I recommend you look at the following hurdles to assess TTPH’s financial health.
Is TTPH growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. TTPH’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. TTPH’s revenue growth over the past year was an impressively high triple-digit rate, 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.
Can TTPH pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Tetraphase Pharmaceuticals 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. Looking at TTPH’s most recent US$11m liabilities, it appears that the company has been able to meet these obligations given the level of current assets of US$120m, with a current ratio of 10.98x. However, anything above 3x may be considered excessive by some investors.
Having no debt on the books means TTPH has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may be different. I admit this is a fairly basic analysis for TTPH’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Tetraphase Pharmaceuticals to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TTPH’s future growth? Take a look at our free research report of analyst consensus for TTPH’s outlook.
- Historical Performance: What has TTPH’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.
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.
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