The direct benefit for The Buckle Inc (NYSE:BKE), 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 BKE 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 BKE has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark foresee of their financial health status. See our latest analysis for Buckle
Is BKE growing fast enough to value 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. BKE’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. BKE delivered a negative revenue growth of -12.93%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can BKE pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Buckle 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 BKE’s most recent $98.6M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.92x. Though, anything above 3x is considered high and could mean that BKE has too much idle capital in low-earning investments.
Next Steps:
Are you a shareholder? BKE’s soft top-line growth means 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 whether the company needs financial flexibility at this point in time. You should take a look into a future growth analysis to properly assess what the market expects for the company moving forward.