Zero-debt allows substantial financial flexibility, especially for small-cap companies like China Sunsine Chemical Holdings Ltd (SGX:CH8), 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 CH8 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.

See our latest analysis for China Sunsine Chemical Holdings

Is CH8 growing fast enough to value financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. Either CH8 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. CH8’s revenue growth over the past year is a double-digit 39% which is considerably high for a small-cap company. 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 CH8 meet its short-term obligations with the cash in hand?

Since China Sunsine Chemical Holdings 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. With current liabilities at CN¥391m, it seems that the business has been able to meet these obligations given the level of current assets of CN¥1.7b, with a current ratio of 4.45x. However, anything above 3x may be considered excessive by some investors. They might argue CH8 is leaving too much capital in low-earning investments.

Next Steps:

As a high-growth company, it may be beneficial for CH8 to have some financial flexibility, hence zero-debt. Since there is also no concerns around CH8’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how CH8 has been performing in the past. You should continue to research China Sunsine Chemical Holdings to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for CH8’s future growth? Take a look at our free research report of analyst consensus for CH8’s outlook.

2. Valuation: What is CH8 worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether CH8 is currently mispriced by the market.

3. 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.