Xiangxing International Holding Limited (HKG:8157), 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 8157 will have to follow strict debt obligations which will reduce its financial flexibility. While 8157 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
See our latest analysis for Xiangxing International Holding
Is 8157 right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. Either 8157 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 revenue growth in the teens is not considered high-growth. 8157’s revenue growth of 14% falls into this range. More capital can help the business grow faster. If 8157 is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does 8157’s liquid assets cover its short-term commitments?
Since Xiangxing International 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. 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. With current liabilities at CN¥11m, the company has been able to meet these commitments with a current assets level of CN¥69m, leading to a 6.08x current account ratio. Having said that, anything above 3x may be considered excessive by some investors. They might argue 8157 is leaving too much capital in low-earning investments.
Next Steps:
8157 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may change. I admit this is a fairly basic analysis for 8157’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Xiangxing International Holding to get a better picture of the stock by looking at: