Zero-debt allows substantial financial flexibility, especially for small-cap companies like Zota Health Care Limited (NSE:ZOTA), 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 ZOTA 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 ZOTA right in choosing financial flexibility over 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. Either ZOTA 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 single-digit revenue growth of 8.7% for ZOTA is considerably low for a small-cap company. More capital can help the business grow faster. If ZOTA is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can ZOTA meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Zota Health Care has no solvency issues, which is 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. Looking at ZOTA’s most recent ₹214m 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 2.61x. Usually, for Pharmaceuticals companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Next Steps:
ZOTA 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. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure ZOTA has company-specific issues impacting its capital structure decisions. I suggest you continue to research Zota Health Care to get a better picture of the stock by looking at: