Zero-debt allows substantial financial flexibility, especially for small-cap companies like Guala Closures SpA (BIT:GCL), 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. 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 recommend you look at the following hurdles to assess GCL’s financial health.
Check out our latest analysis for Guala Closures
Is GCL growing fast enough to value financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. Either GCL 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.
Does GCL’s liquid assets cover its short-term commitments?
Since Guala Closures 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. At the current liabilities level of €11.5m liabilities, it appears that the company has been able to meet these commitments with a current assets level of €508.2m, leading to a 44.31x current account ratio. However, anything above 3x may be considered excessive by some investors. They might argue GCL is leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means GCL 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. Going forward, GCL’s financial situation may change. I admit this is a fairly basic analysis for GCL’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Guala Closures to get a better picture of the stock by looking at:
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Future Outlook: What are well-informed industry analysts predicting for GCL’s future growth? Take a look at our free research report of analyst consensus for GCL’s outlook.
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Valuation: What is GCL worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether GCL is currently mispriced by the market.
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Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.