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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Dedicare AB (STO:DEDI), 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. While DEDI has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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Is financial flexibility worth the 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. DEDI’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. DEDI’s revenue growth over the past year is a single-digit 3.7% which is relatively low for a small-cap company. More capital can help the business grow faster. If DEDI is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does DEDI’s liquid assets cover its short-term commitments?
Since Dedicare 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. At the current liabilities level of kr108m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.75x. For Healthcare companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
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DEDI is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. In the future, its financial position may change. I admit this is a fairly basic analysis for DEDI’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Dedicare to get a more holistic view of the stock by looking at: