Zero-debt allows substantial financial flexibility, especially for small-cap companies like Astrotech Corporation (NASDAQ:ASTC), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ASTC has outstanding 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. See our latest analysis for Astrotech
Does ASTC’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on ASTC’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 ASTC is a high-growth company. Opposite to the high growth we were expecting, ASTC’s negative revenue growth of -12.84% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ASTC meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Astrotech 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. At the current liabilities level of $1.8M liabilities, the company has been able to meet these commitments with a current assets level of $13.7M, leading to a 7.55x current account ratio. However, a ratio greater than 3x may be considered as too high, as ASTC could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? ASTC’s soft top-line growth means having no debt on its balance sheet isn’t necessarily the best thing. 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. I recommend taking a look into a future growth analysis to account for what the market expects for the company moving forward.