Zero-debt allows substantial financial flexibility, especially for small-cap companies like Pegasus International Holdings Limited (HKG:676), 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 676 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.

Check out our latest analysis for Pegasus International Holdings

Is 676 right in choosing financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either 676 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. Opposite to the high growth we were expecting, 676’s negative revenue growth of -23% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Does 676’s liquid assets cover its short-term commitments?

Since Pegasus International Holdings 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. 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 US$7.8m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 4.53x. Having said that, a ratio above 3x may be considered excessive by some investors.

Next Steps:

676 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around 676’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. This is only a rough assessment of financial health, and I’m sure 676 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Pegasus International Holdings to get a better picture of the stock by looking at: