In This Article:
The direct benefit for Feedback plc (LON:FDBK), 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 FDBK will have to adhere to stricter debt covenants and have less 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 Feedback
Is FDBK growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. The lack of debt on FDBK’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 FDBK is a high-growth company. FDBK’s revenue growth in the teens of 19.6% is not considered as high-growth, especially for a small-cap company. 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 FDBK meet its short-term obligations with the cash in hand?
Since Feedback 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 UK£305.0k, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.34x. For Healthcare Services 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.
Next Steps:
FDBK 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 be different. This is only a rough assessment of financial health, and I’m sure FDBK has company-specific issues impacting its capital structure decisions. You should continue to research Feedback to get a more holistic view of the stock by looking at: