Challenger Technologies Limited (SGX:573), 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 573 will have to follow strict debt obligations which will reduce its financial flexibility. While 573 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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 573 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. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on 573’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 573 is a high-growth company. A single-digit revenue growth of 2.5% for 573 is considerably low 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.
Does 573’s liquid assets cover its short-term commitments?
Since Challenger Technologies 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 S$34m, it appears that the company has been able to meet these commitments with a current assets level of S$110m, leading to a 3.28x current account ratio. Having said that, many consider anything above 3x to be quite high and could mean that 573 has too much idle capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for 573 to have some financial flexibility, hence zero-debt. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, 573’s financial situation may change. Keep in mind I haven’t considered other factors such as how 573 has been performing in the past. You should continue to research Challenger Technologies to get a more holistic view of the stock by looking at: