Vistin Pharma ASA (OB:VISTIN), 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 VISTIN will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess VISTIN’s financial health.
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Is VISTIN 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. Either VISTIN 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. VISTIN’s revenue growth over the past year is a double-digit 22% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can VISTIN meet its short-term obligations with the cash in hand?
Since Vistin Pharma 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 øre49m, the company has been able to meet these commitments with a current assets level of øre400m, leading to a 8.16x current account ratio. However, anything above 3x may be considered excessive by some investors.
Next Steps:
Having no debt on the books means VISTIN has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around VISTIN’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, VISTIN’s financial situation may change. I admit this is a fairly basic analysis for VISTIN’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Vistin Pharma to get a better picture of the stock by looking at: