The direct benefit for Marchex Inc (NASDAQ:MCHX), 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 MCHX will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I will take you through a few basic checks to assess the financial health of companies with no debt. View our latest analysis for Marchex
Is MCHX 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. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. MCHX’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. MCHX delivered a negative revenue growth of -9.42%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can MCHX pay its short-term liabilities?
Since Marchex 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. At the current liabilities level of $14.9M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.37x. However, anything about 3x may be excessive, since MCHX may be leaving too much capital in low-earning investments.
Given that Marchex is a relatively low-growth company, not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for MCHX, and why financial flexibility is needed at this stage in its business cycle. I admit this is a fairly basic analysis for MCHX’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Marchex to get a more holistic view of the stock by looking at:
1. Future Outlook: What are well-informed industry analysts predicting for MCHX’s future growth? Take a look at our free research report of analyst consensus for MCHX’s outlook.
2. Valuation: What is MCHX 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 MCHX is currently mispriced by the market.
3. 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 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.