V1 Group Limited (SEHK:82), 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 82 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 82 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. Check out our latest analysis for V1 Group
Does 82’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either 82 does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. A double-digit revenue growth of 24.73% is considered relatively high for a small-cap company like 82. 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.
Does 82’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, V1 Group 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. With current liabilities at HK$134.7M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$1,191.5M, with a current ratio of 8.85x. Though, anything above 3x is considered high and could mean that 82 has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? As a high-growth company, it may be beneficial for 82 to have some financial flexibility, hence zero-debt. Since there is also no concerns around 82’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, 82’s financial situation may change. You should always be keeping on top of market expectations for 82’s future growth.