The direct benefit for Games Workshop Group PLC (LSE:GAW), 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 GAW will have to adhere to stricter debt covenants and have less financial flexibility. While GAW 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. View our latest analysis for Games Workshop Group
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. 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 GAW 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. GAW’s revenue growth over the past year is a double-digit 33.92% which is considerably high for a small-cap company. 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.
Does GAW’s liquid assets cover its short-term commitments?
Since Games Workshop 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. At the current liabilities level of £23.0M liabilities, the company has been able to meet these obligations given the level of current assets of £43.9M, with a current ratio of 1.91x. For leisure 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 a high-growth company, it may be beneficial for GAW to have some financial flexibility, hence zero-debt. Since there is also no concerns around GAW’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, GAW’s financial situation may change. I recommend researching market expectations for GAW’s future growth.