Zero-debt allows substantial financial flexibility, especially for small-cap companies like CCID Consulting Company Limited (HKG:8235), 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 8235 has outstanding financial strength. I recommend you look at the following hurdles to assess 8235’s financial health.
View our latest analysis for CCID Consulting
Is 8235 right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either 8235 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. 8235’s revenue growth over the past year is a double-digit 27.8% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does 8235’s liquid assets cover its short-term commitments?
Since CCID Consulting 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. With current liabilities at CN¥88.0m, it appears that the company has been able to meet these obligations given the level of current assets of CN¥205.5m, with a current ratio of 2.34x. For IT 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:
As a high-growth company, it may be beneficial for 8235 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, its financial position may be different. This is only a rough assessment of financial health, and I’m sure 8235 has company-specific issues impacting its capital structure decisions. I suggest you continue to research CCID Consulting to get a better picture of the stock by looking at: