The direct benefit for Superdry Plc (LON:SDRY), 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 SDRY will have to adhere to stricter debt covenants and have less financial flexibility. While SDRY 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 SDRY 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on SDRY’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 SDRY is a high-growth company. SDRY’s revenue growth in the teens of 16.0% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If SDRY is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SDRY pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Superdry 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 SDRY’s most recent UK£148.0m liabilities, the company has been able to meet these commitments with a current assets level of UK£378.1m, leading to a 2.55x current account ratio. For Specialty Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
SDRY 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. Moving forward, SDRY’s financial situation may change. I admit this is a fairly basic analysis for SDRY’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Superdry to get a more holistic view of the stock by looking at: