Zibao Metals Recycling Holdings Plc (LON:ZBO), 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 ZBO will have to follow strict debt obligations which will reduce its financial flexibility. While ZBO 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 estimate of their financial health status.
Check out our latest analysis for Zibao Metals Recycling Holdings
Does ZBO’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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either ZBO 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 double-digit revenue growth of 22.4% is considered relatively high for a small-cap company like ZBO. 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.
Can ZBO meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Zibao Metals Recycling Holdings 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. At the current liabilities level of HK$24.6m 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 1.99x. Usually, for Trade Distributors companies, this is a suitable ratio as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
As a high-growth company, it may be beneficial for ZBO to have some financial flexibility, hence zero-debt. Since there is also no concerns around ZBO’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. Keep in mind I haven’t considered other factors such as how ZBO has been performing in the past. You should continue to research Zibao Metals Recycling Holdings to get a more holistic view of the stock by looking at: