Zero-debt allows substantial financial flexibility, especially for small-cap companies like San Teh Ltd (SGX:S46), 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 S46 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 San Teh

Is S46 right in choosing financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. S46’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 single-digit revenue growth of 4.1% for S46 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.

Can S46 pay its short-term liabilities?

Since San Teh 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 S46’s S$16m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.83x. Having said that, many consider a ratio above 3x to be high.

Next Steps:

S46 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around S46’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. I admit this is a fairly basic analysis for S46’s financial health. Other important fundamentals need to be considered alongside. You should continue to research San Teh to get a better picture of the stock by looking at: