Why Chuy’s Holdings Inc (NASDAQ:CHUY) Has Zero-Debt On Its Balance Sheet
Chuy’s Holdings Inc (NASDAQ:CHUY), 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 CHUY will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CHUY has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for Chuy’s Holdings
Is CHUY growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. CHUY’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. CHUY’s revenue growth in the teens of 15.17% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If CHUY is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does CHUY’s liquid assets cover its short-term commitments?
Since Chuy’s Holdings 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. With current liabilities at $28.1M liabilities, it seems that the business has not maintained a sufficient level of current assets to meet its obligations, with the current ratio last standing at 0.99x, which is below the prudent industry ratio of 3x.
Next Steps:
Are you a shareholder? Since CHUY is a low-growth stock in terms of its revenues, being in a zero-debt position isn’t always optimal. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to examine the company’s position.
Are you a potential investor? The company’s current holding of liquid assets gives it some level of security in any case of adverse events. However, a relatively low revenue growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. I admit this is a fairly basic analysis for CHUY’s financial health. Other important fundamentals need to be considered alongside. For your next step, you should take a look at CHUY’s past performance to figure out CHUY’s financial health position.
To help readers see pass 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.
