Travel24com AG (FRA:TVD6), 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 TVD6 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 TVD6 has outstanding 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.
View our latest analysis for Travel24.com
Does TVD6’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. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on TVD6’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if TVD6 is a high-growth company. TVD6 delivered a negative revenue growth of -44.3%. 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 TVD6 pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Travel24.com has no solvency issues, which is 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. At the current liabilities level of €7.0m liabilities, it seems that the business may not have an easy time meeting these commitments with a current assets level of €3.9m, leading to a current ratio of 0.56x.
Next Steps:
TVD6 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. However, the company’s low liquidity reduces our conviction around meeting short-term obligations. Some level of low-cost debt funding could help meet these needs. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how TVD6 has been performing in the past. I suggest you continue to research Travel24.com to get a better picture of the stock by looking at: