Tian Yuan Group Holdings Limited (HKG:6119), 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 6119 will have to follow strict debt obligations which will reduce its financial flexibility. While 6119 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 6119’s financial health.
Is 6119 growing fast enough to value financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. 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. The lack of debt on 6119’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if 6119 is a high-growth company. A revenue growth in the teens is not considered high-growth. 6119’s revenue growth of 17.0% falls into this range. More capital can help the business grow faster. If 6119 is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can 6119 pay its short-term liabilities?
Since Tian Yuan Group Holdings 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 CN¥15.5m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 12.31x. However, anything above 3x is considered high and could mean that 6119 has too much idle capital in low-earning investments.
6119 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 be different. Keep in mind I haven’t considered other factors such as how 6119 has been performing in the past. You should continue to research Tian Yuan Group Holdings to get a better picture of the stock by looking at:
- Future Outlook: What are well-informed industry analysts predicting for 6119’s future growth? Take a look at our free research report of analyst consensus for 6119’s outlook.
- Historical Performance: What has 6119’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.
- 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.
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