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What does ikeGPS Group Limited’s (NZSE:IKE) Balance Sheet Tell Us About Its Future?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like ikeGPS Group Limited (NZSE:IKE), 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 IKE has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess IKE’s financial health.

View our latest analysis for ikeGPS Group

Does IKE’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. Either IKE 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 36.7% is considered relatively high for a small-cap company like IKE. 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.

NZSE:IKE Historical Debt September 26th 18
NZSE:IKE Historical Debt September 26th 18

Can IKE meet its short-term obligations with the cash in hand?

Given zero long-term debt on its balance sheet, ikeGPS Group 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 NZ$2.3m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of NZ$5.4m, with a current ratio of 2.4x. Usually, for Electronic companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

IKE is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around IKE’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how IKE has been performing in the past. I suggest you continue to research ikeGPS Group to get a more holistic view of the stock by looking at:

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  1. Historical Performance: What has IKE’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.

  2. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.