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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Brunel International N.V. (AMS:BRNL), 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 BRNL has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. BRNL’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. BRNL’s revenue growth over the past year is a single-digit 4.9% which is relatively low for a small-cap company. More capital can help the business grow faster. If BRNL is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can BRNL meet its short-term obligations with the cash in hand?
Since Brunel International 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. 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 €105m, it seems that the business has been able to meet these commitments with a current assets level of €335m, leading to a 3.2x current account ratio. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
As a high-growth company, it may be beneficial for BRNL to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, BRNL’s financial situation may change. I admit this is a fairly basic analysis for BRNL’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Brunel International to get a more holistic view of the stock by looking at: