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Nissin Foods Company Limited (HKG:1475), 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 1475 will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 1475 has outstanding 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 financial flexibility worth the 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. 1475’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. 1475’s revenue growth over the past year is a double-digit 23% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can 1475 meet its short-term obligations with the cash in hand?
Since Nissin Foods 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. With current liabilities at HK$918m, it seems that the business has been able to meet these commitments with a current assets level of HK$3.0b, leading to a 3.25x current account ratio. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue 1475 could be holding too much capital in a low-return investment environment.
Next Steps:
Having no debt on the books means 1475 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around 1475’s liquidity needs, this may be its optimal capital structure for the time being. In the future, 1475’s financial situation may change. This is only a rough assessment of financial health, and I’m sure 1475 has company-specific issues impacting its capital structure decisions. You should continue to research Nissin Foods to get a more holistic view of the stock by looking at: