The direct benefit for Albert Technologies Ltd (LON:ALB), 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 ALB will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean ALB 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.
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Is ALB right in choosing financial flexibility over 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. ALB’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. Opposite to the high growth we were expecting, ALB’s negative revenue growth of -140% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can ALB pay its short-term liabilities?
Since Albert Technologies doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term 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. At the current liabilities level of US$3.0m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of US$24.2m, with a current ratio of 8.16x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue ALB could be holding too much capital in a low-return investment environment.
Next Steps:
ALB 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. In the future, ALB’s financial situation may change. This is only a rough assessment of financial health, and I’m sure ALB has company-specific issues impacting its capital structure decisions. You should continue to research Albert Technologies to get a more holistic view of the stock by looking at: