Molecular Partners AG (VTX:MOLN), 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 MOLN will have to follow strict debt obligations which will reduce its 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 will take you through a few basic checks to assess the financial health of companies with no debt.
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Does MOLN’s growth rate justify its decision for 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 MOLN 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. MOLN delivered a strikingly high revenue growth of 51.2% 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.
Can MOLN pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Molecular Partners 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 CHF6.6m, the company has been able to meet these obligations given the level of current assets of CHF125.8m, with a current ratio of 18.92x. Having said that, a ratio greater than 3x may be considered as quite high, and some might argue MOLN could be holding too much capital in a low-return investment environment.
Next Steps:
Having no debt on the books means MOLN has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, MOLN’s financial situation may change. I admit this is a fairly basic analysis for MOLN’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Molecular Partners to get a more holistic view of the stock by looking at: