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Clifford Modern Living Holdings Limited (HKG:3686), 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 3686 will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? 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.
View our latest analysis for Clifford Modern Living Holdings
Is financial flexibility worth the lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either 3686 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. 3686’s revenue growth over the past year is a single-digit 5.1% which is relatively low for a small-cap company. More capital can help the business grow faster. If 3686 is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does 3686’s liquid assets cover its short-term commitments?
Since Clifford Modern Living 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. Looking at 3686’s CN¥130m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.03x. However, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
3686 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 3686’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 3686 has been performing in the past. I recommend you continue to research Clifford Modern Living Holdings to get a more holistic view of the stock by looking at: