The direct benefit for Benitec Biopharma Limited (ASX:BLT), 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 BLT will have to adhere to stricter debt covenants and have less financial flexibility. While BLT 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.

See our latest analysis for Benitec Biopharma

Is financial flexibility worth the lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. The lack of debt on BLT’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 BLT is a high-growth company. Opposite to the high growth we were expecting, BLT’s negative revenue growth of -58% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Can BLT pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Benitec Biopharma 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. At the current liabilities level of AU$2.5m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 8.2x. Having said that, a ratio greater than 3x may be considered high by some.

Next Steps:

BLT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around BLT’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, BLT’s financial situation may change. Keep in mind I haven’t considered other factors such as how BLT has been performing in the past. I suggest you continue to research Benitec Biopharma to get a better picture of the stock by looking at:

1. Historical Performance: What has BLT’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.