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The direct benefit for New Century Healthcare Holding Co Limited (HKG:1518), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is 1518 will have to adhere to stricter debt covenants and have less financial flexibility. While 1518 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.
Check out our latest analysis for New Century Healthcare Holding
Is 1518 right in choosing 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 1518 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. A revenue growth in the teens is not considered high-growth. 1518’s revenue growth of 11% falls into this range. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can 1518 pay its short-term liabilities?
Since New Century Healthcare Holding 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 CN¥190m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 5.32x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue 1518 could be holding too much capital in a low-return investment environment.
Next Steps:
1518 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 1518’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. I admit this is a fairly basic analysis for 1518’s financial health. Other important fundamentals need to be considered alongside. You should continue to research New Century Healthcare Holding to get a better picture of the stock by looking at: