Zero-debt allows substantial financial flexibility, especially for small-cap companies like Zodiac-JRD-MKJ Limited (NSEI:ZODJRDMKJ), 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 zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? 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. View our latest analysis for Zodiac-JRD-MKJ
Is ZODJRDMKJ growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. ZODJRDMKJ’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. A revenue growth in the teens is not considered high-growth. ZODJRDMKJ’s revenue growth of 12.26% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can ZODJRDMKJ pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Zodiac-JRD-MKJ 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 ZODJRDMKJ’s most recent ₹53.7M liabilities, the company has been able to meet these commitments with a current assets level of ₹701.6M, leading to a 13.07x current account ratio. However, anything above 3x is considered high and could mean that ZODJRDMKJ has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? Since ZODJRDMKJ is a low-growth stock in terms of its revenues, not taking advantage of lower cost debt may not be the best strategy. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and why financial flexibility is needed at this stage in its business cycle. You should take a look into a future growth analysis to properly assess what the market expects for the company moving forward.