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The direct benefit for Sedana Medical AB (publ) (STO:SEDANA), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is SEDANA will have to adhere to stricter debt covenants and have less financial flexibility. 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 SEDANA’s financial health.
Check out our latest analysis for Sedana Medical
Is SEDANA 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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either SEDANA 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 double-digit revenue growth of 31% is considered relatively high for a small-cap company like SEDANA. 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.
Can SEDANA pay its short-term liabilities?
Since Sedana Medical 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of kr15m, it seems that the business has been able to meet these obligations given the level of current assets of kr194m, with a current ratio of 12.61x. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
SEDANA 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, SEDANA’s financial situation may change. Keep in mind I haven’t considered other factors such as how SEDANA has been performing in the past. You should continue to research Sedana Medical to get a better picture of the stock by looking at: