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The direct benefit for Vixtel Technologies Holdings Limited (HKG:8342), 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 8342 will have to adhere to stricter debt covenants and have less financial flexibility. While 8342 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.
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Is 8342 growing fast enough to value 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. 8342’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A double-digit revenue growth of 22.5% is considered relatively high for a small-cap company like 8342. 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 8342’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Vixtel Technologies 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. Looking at 8342’s most recent CN¥32.8m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of CN¥188.3m, with a current ratio of 5.75x. Having said that, anything above 3x may be considered excessive by some investors. They might argue 8342 is leaving too much capital in low-earning investments.
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As a high-growth company, it may be beneficial for 8342 to have some financial flexibility, hence zero-debt. Since there is also no concerns around 8342’s liquidity needs, this may be its optimal capital structure for the time being. In the future, 8342’s financial situation may change. Keep in mind I haven’t considered other factors such as how 8342 has been performing in the past. You should continue to research Vixtel Technologies Holdings to get a better picture of the stock by looking at: