Joyce Boutique Holdings Limited (SEHK:647), 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 647 will have to follow strict debt obligations which will reduce its financial flexibility. While 647 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt. Check out our latest analysis for Joyce Boutique Holdings
Does 647’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either 647 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. 647 delivered a negative revenue growth of -18.58%. 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.
Can 647 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Joyce Boutique Holdings has no solvency issues, which is 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. At the current liabilities level of HK$169.5M liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.31x. However, a ratio greater than 3x may be considered as too high, as 647 could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? As 647’s revenues are not growing at a fast enough pace, having no debt on its balance sheet isn’t necessarily the best thing. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to examine the company’s position.
Are you a potential investor? In terms of meeting is short term obligations, there’s nothing to worry about for 647. But, its soft revenue 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 647 has company-specific issues impacting its capital structure decisions. I encourage you to continue your research by taking a look at 647’s past performance in order to determine for yourself whether its zero-debt position is justified.
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.