Nitiraj Engineers Limited (NSE:NITIRAJ), 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 NITIRAJ will have to follow strict debt obligations which will reduce its financial flexibility. While NITIRAJ has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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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Does NITIRAJ’s growth rate justify its decision for 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. NITIRAJ’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. NITIRAJ delivered a negative revenue growth of -24%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can NITIRAJ meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Nitiraj Engineers 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 ₹30m, the company has been able to meet these commitments with a current assets level of ₹200m, leading to a 6.7x current account ratio. Having said that, a ratio above 3x may be considered excessive by some investors, yet this is not usually a major negative for a company.
Next Steps:
Having no debt on the books means NITIRAJ 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. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how NITIRAJ has been performing in the past. You should continue to research Nitiraj Engineers to get a better picture of the stock by looking at: