In This Article:
The direct benefit for The Character Group plc (LON:CCT), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is CCT will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CCT has outstanding financial strength. I recommend you look at the following hurdles to assess CCT’s financial health.
See our latest analysis for Character Group
Is CCT right in choosing 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. CCT’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. CCT delivered a negative revenue growth of -11.1%. 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.
Does CCT’s liquid assets cover its short-term commitments?
Since Character Group 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. With current liabilities at UK£16.4m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.11x. For Leisure 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:
CCT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around CCT’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how CCT has been performing in the past. I recommend you continue to research Character Group to get a more holistic view of the stock by looking at: