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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Moneysupermarketcom Group PLC (LON:MONY), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean MONY has outstanding financial strength. I recommend you look at the following hurdles to assess MONY’s financial health.
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Is MONY right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 MONY 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 4.3% for MONY 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 MONY’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Moneysupermarket.com Group 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 UK£60.3m liabilities, it seems that the business has been able to meet these commitments with a current assets level of UK£79.9m, leading to a 1.33x current account ratio. For Internet companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
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MONY is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how MONY has been performing in the past. I suggest you continue to research Moneysupermarket.com Group to get a better picture of the stock by looking at: