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LiveHire Limited (ASX:LVH), 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 LVH will have to follow strict debt obligations which will reduce its financial flexibility. While LVH has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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 LiveHire
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. LVH’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. LVH delivered a strikingly high triple-digit revenue growth over the past year, therefore the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can LVH pay its short-term liabilities?
Since LiveHire 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 AU$1.9m, it appears that the company has been able to meet these commitments with a current assets level of AU$31m, leading to a 16.75x current account ratio. Having said that, many consider a ratio above 3x to be high.
Next Steps:
As a high-growth company, it may be beneficial for LVH to have some financial flexibility, hence zero-debt. Since there is also no concerns around LVH’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure LVH has company-specific issues impacting its capital structure decisions. I suggest you continue to research LiveHire to get a better picture of the stock by looking at: