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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Tradelink Electronic Commerce Limited (HKG:536), 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
See our latest analysis for Tradelink Electronic Commerce
Is 536 growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. The lack of debt on 536’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if 536 is a high-growth company. A single-digit revenue growth of 6.7% for 536 is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can 536 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Tradelink Electronic Commerce has no solvency issues, which is 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 HK$201m, it seems that the business may not have an easy time meeting these commitments with a current assets level of HK$124m, leading to a current ratio of 0.62x.
Next Steps:
536 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. However, its lack of liquidity lowers our confidence around meeting near-term obligations. Some level of low-cost debt funding could help meet these needs. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how 536 has been performing in the past. I recommend you continue to research Tradelink Electronic Commerce to get a more holistic view of the stock by looking at: