Zero-debt allows substantial financial flexibility, especially for small-cap companies like ZIOPHARM Oncology Inc (NASDAQ:ZIOP), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. While ZIOP 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 ZIOP’s financial health.
Is ZIOP 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. Either ZIOP 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. ZIOP delivered a negative revenue growth of -73%. 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.
Does ZIOP’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, ZIOPHARM Oncology has no solvency issues, which is 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. Looking at ZIOP’s most recent US$60m liabilities, it seems that the business arguably has a rather low level of current assets relative its obligations, with the current ratio last standing at 0.78x.
ZIOP is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Though, the company’s low liquidity reduces our conviction around meeting near-term obligations. Some level of low-cost debt funding could help address these needs. Moving forward, its financial position may change. Keep in mind I haven’t considered other factors such as how ZIOP has been performing in the past. I suggest you continue to research ZIOPHARM Oncology to get a more holistic view of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for ZIOP’s future growth? Take a look at our free research report of analyst consensus for ZIOP’s outlook.
- Valuation: What is ZIOP 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 ZIOP 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.
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