Prosten Health Holdings Limited (SEHK:8026), 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 8026 will have to follow strict debt obligations which will reduce its financial flexibility. While 8026 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. See our latest analysis for Prosten Health Holdings
Is 8026 right in choosing 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. The lack of debt on 8026’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if 8026 is a high-growth company. 8026 delivered a strikingly high triple-digit revenue growth over the past year, 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 8026’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Prosten Health 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 8026’s most recent HK$28.9M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.38x. Usually, for internet companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for 8026 to have some financial flexibility, hence zero-debt. Since there is also no concerns around 8026’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. You should always be keeping abreast of market expectations for 8026’s future growth.