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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Thorney Technologies Ltd (ASX:TEK), 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. While TEK has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Is TEK 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. The lack of debt on TEK’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 TEK is a high-growth company. TEK’s revenue growth over the past year is an impressively high double-digit 81.3%. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can TEK meet its short-term obligations with the cash in hand?
Since Thorney Technologies 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. 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 TEK’s most recent AU$1.2m liabilities, the company has been able to meet these commitments with a current assets level of AU$57.8m, leading to a 47.17x current account ratio. Though, anything above 3x is considered high and could mean that TEK has too much idle capital in low-earning investments.
Having no debt on the books means TEK 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. In the future, TEK’s financial situation may change. I admit this is a fairly basic analysis for TEK’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Thorney Technologies to get a more holistic view of the stock by looking at:
Valuation: What is TEK 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 TEK is currently mispriced by the market.
Historical Performance: What has TEK’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.
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.