Snakk Media Limited (NZSE:SNK), 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 SNK will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean SNK has outstanding financial strength. I recommend you look at the following hurdles to assess SNK’s financial health. See our latest analysis for Snakk Media

Is SNK growing fast enough to value financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either SNK 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. SNK’s revenue growth over the past year is a single-digit 1.07% which is relatively low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.

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

Given zero long-term debt on its balance sheet, Snakk Media 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. Looking at SNK’s most recent NZ$3.0M liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.23x. For Media companies, this ratio is within a sensible range since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Next Steps:

As SNK’s revenues are not growing at a fast enough pace, not having any low-cost debt funding may not be optimal for the business. As shareholders, you should try and determine whether this strategy is justified for SNK, and why financial flexibility is needed at this stage in its business cycle. This is only a rough assessment of financial health, and I’m sure SNK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Snakk Media to get a better picture of the stock by looking at: