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Zero-debt allows substantial financial flexibility, especially for small-cap companies like China Best Group Holding Limited (SEHK:370), 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. While 370 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark predict of their financial health status. See our latest analysis for China Best Group Holding
Does 370’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. 370’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. 370’s revenue growth over the past year is a double-digit 45.17% which is considerably high for a small-cap company. 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 370’s liquid assets cover its short-term commitments?
Since China Best Group Holding 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. Looking at 370’s most recent HK$31.07M liabilities, it appears that the company has been able to meet these obligations given the level of current assets of HK$905.97M, with a current ratio of 29.16x. However, anything about 3x may be excessive, since 370 may be leaving too much capital in low-earning investments.
Next Steps:
As 370’s revenues are not growing at a fast enough pace, having no debt on its balance sheet isn’t necessarily the best thing. Shareholders should understand why the company isn’t opting for cheaper cost of capital to fund future growth, and whether the company needs financial flexibility at this point in time. This is only a rough assessment of financial health, and I’m sure 370 has company-specific issues impacting its capital structure decisions. I suggest you continue to research China Best Group Holding to get a more holistic view of the stock by looking at: