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ComOps Limited (ASX:COM), 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 COM 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.
See our latest analysis for ComOps
Is COM right in choosing 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. The lack of debt on COM’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if COM is a high-growth company. A single-digit revenue growth of 1.7% for COM is considerably low for a small-cap company. More capital can help the business grow faster. If COM is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can COM pay its short-term liabilities?
Since ComOps 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 AU$3.7m, it seems that the business may not have an easy time meeting these commitments with a current assets level of AU$2.1m, leading to a current ratio of 0.57x.
Next Steps:
As a high-growth company, it may be beneficial for COM to have some financial flexibility, hence zero-debt. Though, the company’s low liquidity reduces our conviction around meeting near-term obligations. Some level of low-cost debt funding could help meet these needs. In the future, COM’s financial situation may change. This is only a rough assessment of financial health, and I’m sure COM has company-specific issues impacting its capital structure decisions. I suggest you continue to research ComOps to get a better picture of the stock by looking at: