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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Mi Ming Mart Holdings Limited (HKG:8473), 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.
Check out our latest analysis for Mi Ming Mart Holdings
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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. The lack of debt on 8473’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 8473 is a high-growth company. A double-digit revenue growth of 23% is considered relatively high for a small-cap company like 8473. 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 8473’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Mi Ming Mart Holdings 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. At the current liabilities level of HK$7.7m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 14.36x. However, many consider a ratio above 3x to be high, although this is not necessarily a bad thing.
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As a high-growth company, it may be beneficial for 8473 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. In the future, its financial position may change. I admit this is a fairly basic analysis for 8473’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Mi Ming Mart Holdings to get a better picture of the stock by looking at: