Zero-debt allows substantial financial flexibility, especially for small-cap companies like Antisense Therapeutics Limited (ASX:ANP), 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 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 recommend you look at the following hurdles to assess ANP’s financial health. View our latest analysis for Antisense Therapeutics
Does ANP’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. The lack of debt on ANP’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if ANP is a high-growth company. ANP delivered a negative revenue growth of -64.69%. 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 ANP meet its short-term obligations with the cash in hand?
Since Antisense Therapeutics 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. Looking at ANP’s most recent A$0.7M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.68x. Though, a ratio greater than 3x may be considered as too high, as ANP could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? Since ANP is a low-growth stock in terms of its revenues, being in a zero-debt position isn’t always optimal. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. I recommend taking a look into a future growth analysis to examine the company’s position.