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NeuroScientific Biopharmaceuticals Ltd (ASX:NSB), 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 NSB will have to follow strict debt obligations which will reduce its financial flexibility. 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
Check out our latest analysis for NeuroScientific Biopharmaceuticals
Is NSB growing fast enough to value financial flexibility over 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. The lack of debt on NSB’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 NSB is a high-growth company. Opposite to the high growth we were expecting, NSB’s negative revenue growth of -24% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does NSB’s liquid assets cover its short-term commitments?
Since NeuroScientific Biopharmaceuticals 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 AU$76k, the company has been able to meet these commitments with a current assets level of AU$287k, leading to a 3.75x 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 NSB 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, its financial position may change. This is only a rough assessment of financial health, and I’m sure NSB has company-specific issues impacting its capital structure decisions. You should continue to research NeuroScientific Biopharmaceuticals to get a better picture of the stock by looking at: