The direct benefit for Ultralife Corporation (NASDAQ:ULBI), 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 ULBI will have to adhere to stricter debt covenants and have less financial flexibility. While ULBI has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess ULBI’s financial health.
Is ULBI 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. 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. ULBI’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. A single-digit revenue growth of 4.9% for ULBI is considerably low for a small-cap company. More capital can help the business grow faster. If ULBI is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can ULBI meet its short-term obligations with the cash in hand?
Since Ultralife 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 ULBI’s US$12m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.34x. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Having no debt on the books means ULBI has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ULBI’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. Keep in mind I haven’t considered other factors such as how ULBI has been performing in the past. I suggest you continue to research Ultralife to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ULBI’s future growth? Take a look at our free research report of analyst consensus for ULBI’s outlook.
- Valuation: What is ULBI 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 ULBI 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.