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Oxurion NV (EBR:OXUR), 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 OXUR will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean OXUR 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 OXUR growing fast enough to value 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 OXUR 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. OXUR delivered a strikingly high revenue growth of 71% over the past year. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Does OXUR’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Oxurion 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. With current liabilities at €6.5m, it appears that the company has been able to meet these obligations given the level of current assets of €109m, with a current ratio of 16.77x. Having said that, a ratio greater than 3x may be considered by some to be quite high, however this is not necessarily a negative for the company.
Next Steps:
As a high-growth company, it may be beneficial for OXUR to have some financial flexibility, hence zero-debt. Since there is also no concerns around OXUR’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, OXUR’s financial situation may change. Keep in mind I haven’t considered other factors such as how OXUR has been performing in the past. I suggest you continue to research Oxurion to get a better picture of the stock by looking at: