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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Vobile Group Limited (HKG:3738), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 3738 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.
Check out our latest analysis for Vobile Group
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. 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 3738’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 3738 is a high-growth company. Opposite to the high growth we were expecting, 3738’s negative revenue growth of -4.8% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can 3738 meet its short-term obligations with the cash in hand?
Since Vobile Group 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. Looking at 3738’s most recent US$3.9m liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 10.52x. However, anything about 3x may be excessive, since 3738 may be leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means 3738 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. This is only a rough assessment of financial health, and I’m sure 3738 has company-specific issues impacting its capital structure decisions. You should continue to research Vobile Group to get a better picture of the stock by looking at: