The LGL Group Inc (AMEX:LGL), 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 LGL will have to follow strict debt obligations which will reduce its financial flexibility. While LGL 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. See our latest analysis for LGL
Does LGL’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either LGL 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. A single-digit revenue growth of 0.86% for LGL is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Does LGL’s liquid assets cover its short-term commitments?
Since LGL 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. 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 LGL’s most recent $2.8M liabilities, it seems that the business has been able to meet these obligations given the level of current assets of $12.9M, with a current ratio of 4.68x. Though, a ratio greater than 3x may be considered as too high, as LGL could be holding too much capital in a low-return investment environment.
Next Steps:
Are you a shareholder? Since LGL is a low-growth stock in terms of its revenues, not having any low-cost debt funding may not be optimal for the business. 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. I recommend taking a look into a future growth analysis to properly assess what the market expects for the company moving forward.
Are you a potential investor? LGL’s health in terms of financial liquidity should ease potential investors’ concerns. But, a relatively low revenue growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. This is only a rough assessment of financial health, and I’m sure LGL has company-specific issues impacting its capital structure decisions. I encourage you to continue your research by taking a look at LGL’s past performance to conclude on LGL’s financial health.
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.