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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Bhansali Engineering Polymers Limited (NSE:BEPL), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean BEPL has outstanding financial strength. I recommend you look at the following hurdles to assess BEPL’s financial health.
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Is BEPL 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. Either BEPL 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. BEPL delivered a strikingly high revenue growth of 64.8% over the past year. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can BEPL meet its short-term obligations with the cash in hand?
Since Bhansali Engineering Polymers 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. 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 BEPL’s most recent ₹1.51b liabilities, the company has been able to meet these commitments with a current assets level of ₹3.07b, leading to a 2.04x current account ratio. For Chemicals companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
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As a high-growth company, it may be beneficial for BEPL to have some financial flexibility, hence zero-debt. 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, BEPL’s financial situation may change. This is only a rough assessment of financial health, and I’m sure BEPL has company-specific issues impacting its capital structure decisions. You should continue to research Bhansali Engineering Polymers to get a better picture of the stock by looking at: