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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Physiomics Plc (LON:PYC), 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. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean PYC has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
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Is PYC growing fast enough to value 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. PYC’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. PYC’s revenue growth over the past year is an impressively high double-digit 90%. 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 PYC’s liquid assets cover its short-term commitments?
Since Physiomics 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at UK£128k, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.34x. Having said that, a ratio greater than 3x may be considered as quite high.
Next Steps:
Having no debt on the books means PYC 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 change. This is only a rough assessment of financial health, and I’m sure PYC has company-specific issues impacting its capital structure decisions. You should continue to research Physiomics to get a more holistic view of the stock by looking at: