The direct benefit for Travelzoo (NASDAQ:TZOO), 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 TZOO will have to adhere to stricter debt covenants and have less financial flexibility. While TZOO 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 TZOO 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. TZOO’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. TZOO’s revenue growth over the past year is a single-digit 4.6% which is relatively low for a small-cap company. More capital can help the business grow faster. If TZOO is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does TZOO’s liquid assets cover its short-term commitments?
Since Travelzoo 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. At the current liabilities level of US$24m, the company has been able to meet these commitments with a current assets level of US$31m, leading to a 1.3x current account ratio. Usually, for Interactive Media and Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Having no debt on the books means TZOO has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around TZOO’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how TZOO has been performing in the past. I recommend you continue to research Travelzoo to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for TZOO’s future growth? Take a look at our free research report of analyst consensus for TZOO’s outlook.
- Valuation: What is TZOO 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 TZOO 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 firstname.lastname@example.org.