Cellcast plc (AIM:CLTV), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is CLTV will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CLTV has outstanding financial strength. I recommend you look at the following hurdles to assess CLTV’s financial health. Check out our latest analysis for Cellcast
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either CLTV 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. A single-digit revenue growth of 1.95% for CLTV is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does CLTV’s liquid assets cover its short-term commitments?
Since Cellcast 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. At the current liabilities level of £1.6M liabilities, the company has been able to meet these commitments with a current assets level of £4.0M, leading to a 2.43x current account ratio. For media companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
Are you a shareholder? Given that Cellcast is a relatively low-growth company, not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for CLTV, 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 what the market expects for the company moving forward.
Are you a potential investor? CLTV’s financial health in terms of its liquidity shouldn’t be a concern for potential investors. However, its low sales growth means there’s potential to improve return on capital by taking on some debt and ramp up growth. This is only a rough assessment of financial health, and I’m sure CLTV has company-specific issues impacting its capital structure decisions. For your next step, you should take a look at CLTV’s past performance to figure out CLTV’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.