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The direct benefit for Sedana Medical AB (publ) (OM:SEDANA), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is SEDANA will have to adhere to stricter debt covenants and have less financial flexibility. While SEDANA has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess SEDANA’s financial health. View our latest analysis for Sedana Medical
Does SEDANA’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 SEDANA 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. A double-digit revenue growth of 28.33% is considered relatively high for a small-cap company like SEDANA. 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.
Can SEDANA meet its short-term obligations with the cash in hand?
At the current liabilities level of KR14.97M liabilities, the company has been able to meet these obligations given the level of current assets of KR99.10M, with a current ratio of 6.62x. Though, a ratio greater than 3x may be considered as too high, as SEDANA could be holding too much capital in a low-return investment environment.
Next Steps:
SEDANA 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 SEDANA’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 SEDANA has company-specific issues impacting its capital structure decisions. You should continue to research Sedana Medical to get a better picture of the stock by looking at:
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1. Future Outlook: What are well-informed industry analysts predicting for SEDANA’s future growth? Take a look at our free research report of analyst consensus for SEDANA’s outlook.
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2. Historical Performance: What has SEDANA’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
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3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned.