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The direct benefit for PageGroup plc (LON:PAGE), 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 PAGE will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean PAGE has outstanding financial strength. 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.
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Is PAGE growing fast enough to value 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 PAGE 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. PAGE’s revenue growth of 12% falls into this range. More capital can help the business grow faster. If PAGE is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does PAGE’s liquid assets cover its short-term commitments?
Since PageGroup 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 UK£209m, it appears that the company has been able to meet these commitments with a current assets level of UK£438m, leading to a 2.09x current account ratio. Usually, for Professional Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
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Having no debt on the books means PAGE has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how PAGE has been performing in the past. I recommend you continue to research PageGroup to get a better picture of the stock by looking at: