Utah Medical Products Inc (NASDAQ:UTMD), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is UTMD will have to follow strict debt obligations which will reduce its financial flexibility. While UTMD 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 UTMD right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either UTMD does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A single-digit revenue growth of 6.5% for UTMD is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can UTMD pay its short-term liabilities?
Since Utah Medical Products 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. With current liabilities at US$5.2m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 10.67x. Though, anything about 3x may be excessive, since UTMD may be leaving too much capital in low-earning investments.
UTMD is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around UTMD’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, UTMD’s financial situation may change. Keep in mind I haven’t considered other factors such as how UTMD has been performing in the past. I recommend you continue to research Utah Medical Products to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for UTMD’s future growth? Take a look at our free research report of analyst consensus for UTMD’s outlook.
- Valuation: What is UTMD 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 UTMD 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.