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Cemat A/S (CPH:CEMAT), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is CEMAT will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean CEMAT has outstanding financial strength. I recommend you look at the following hurdles to assess CEMAT’s financial health.
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Is CEMAT right in choosing financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. CEMAT’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. CEMAT’s revenue growth over the past year is a single-digit 6.2% which is relatively low for a small-cap company. More capital can help the business grow faster. If CEMAT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can CEMAT pay its short-term liabilities?
Since Cemat 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. With current liabilities at ø5.8m, the company has been able to meet these obligations given the level of current assets of ø22m, with a current ratio of 3.76x. However, a ratio above 3x may be considered excessive by some investors.
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As a high-growth company, it may be beneficial for CEMAT to have some financial flexibility, hence zero-debt. Since there is also no concerns around CEMAT’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, CEMAT’s financial situation may change. I admit this is a fairly basic analysis for CEMAT’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Cemat to get a more holistic view of the stock by looking at: