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JLT Mobile Computers AB (publ) (STO:JLT), 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 JLT 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 take you through a few basic checks to assess the financial health of companies with no debt.
Check out our latest analysis for JLT Mobile Computers
Is JLT 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. JLT’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. A revenue growth in the teens is not considered high-growth. JLT’s revenue growth of 15% 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.
Does JLT’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, JLT Mobile Computers has no solvency issues, which is 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 kr35m, it appears that the company has been able to meet these commitments with a current assets level of kr86m, leading to a 2.45x current account ratio. Usually, for Tech companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
Having no debt on the books means JLT has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around JLT’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure JLT has company-specific issues impacting its capital structure decisions. I suggest you continue to research JLT Mobile Computers to get a more holistic view of the stock by looking at: