The direct benefit for Informatics Education Ltd (SGX:BOU), 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 BOU will have to adhere to stricter debt covenants and have less financial flexibility. While BOU 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 Informatics Education
Is BOU right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. Either BOU 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. Opposite to the high growth we were expecting, BOU’s negative revenue growth of -17.03% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does BOU’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Informatics Education has no solvency issues, which is 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. Looking at BOU’s most recent SGD4.4M liabilities, the company has been able to meet these obligations given the level of current assets of SGD11.5M, with a current ratio of 2.6x. For consumer services companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
Are you a shareholder? As BOU’s revenues are not growing at a fast enough pace, being in a zero-debt position isn’t always optimal. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to properly assess what the market expects for the company moving forward.