Is Wisdom Sports Group (HKG:1661) A Financially Sound Company?
The direct benefit for Wisdom Sports Group (HKG:1661), 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 1661 will have to adhere to stricter debt covenants and have less financial flexibility. While 1661 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
View our latest analysis for Wisdom Sports Group
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. 1661’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 revenue growth in the teens is not considered high-growth. 1661’s revenue growth of 15.0% falls into this range. 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.
Does 1661’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Wisdom Sports Group has no solvency issues, which is 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 1661’s most recent CN¥73.5m liabilities, it seems that the business has been able to meet these commitments with a current assets level of CN¥882.4m, leading to a 12.01x current account ratio. Having said that, many consider anything above 3x to be quite high and could mean that 1661 has too much idle capital in low-earning investments.
Next Steps:
Having no debt on the books means 1661 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around 1661’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure 1661 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Wisdom Sports Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 1661’s future growth? Take a look at our free research report of analyst consensus for 1661’s outlook.
Valuation: What is 1661 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 1661 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 editorial-team@simplywallst.com.
