Zero-debt allows substantial financial flexibility, especially for small-cap companies like Blaze International Limited (ASX:BLZ), 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 BLZ’s financial health. View our latest analysis for Blaze International
Is BLZ right in choosing 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. The lack of debt on BLZ’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 BLZ is a high-growth company.
Can BLZ pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Blaze International 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. With current liabilities at A$0.0M liabilities, it appears that the company has been able to meet these commitments with a current assets level of A$1.3M, leading to a 85.09x current account ratio. Though, anything above 3x is considered high and could mean that BLZ has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? BLZ is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, BLZ’s financial situation may change. You should always be keeping on top of market expectations for BLZ’s future growth.
Are you a potential investor? Blaze International is a fast-growing company, making financial flexibility a valuable option for the company. In addition, its high liquidity means the company should continue to operate smoothly in the case of adverse events. In order to build your confidence in the stock, you need to also examine BLZ’s track record. As a following step, you should take a look at BLZ’s past performance to figure out BLZ’s financial health position.
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.