Zero-debt allows substantial financial flexibility, especially for small-cap companies like Wangle Technologies Limited (ASX:WGL), 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. While WGL has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess WGL’s financial health. See our latest analysis for Wangle Technologies
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. WGL’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. WGL delivered a negative revenue growth of -25.53%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does WGL’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Wangle Technologies has no solvency issues, which is 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 A$0.3M, the company has been able to meet these commitments with a current assets level of A$1.0M, leading to a 3.6x current account ratio. However, a ratio greater than 3x may be considered as too high, as WGL could be holding too much capital in a low-return investment environment.
Next Steps:
Since WGL is a low-growth stock in terms of its revenues, not having any low-cost debt funding may not be optimal for the business. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. Keep in mind I haven’t considered other factors such as how WGL has been performing in the past. I suggest you continue to research Wangle Technologies to get a more holistic view of the stock by looking at: