Yahoo Finance Are NIC Inc’s (NASDAQ:EGOV) Interest Costs Too High?
NIC Inc (NASDAQ:EGOV), 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 EGOV will have to follow strict debt obligations which will reduce its financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess EGOV’s financial health.
View our latest analysis for NIC
Is financial flexibility worth the lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on EGOV’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 EGOV is a high-growth company. A single-digit revenue growth of 6.1% for EGOV is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can EGOV meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, NIC has no solvency issues, which is 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. At the current liabilities level of US$95m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$278m, leading to a 2.93x current account ratio. For IT companies, this ratio is within a sensible range since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Next Steps:
As a high-growth company, it may be beneficial for EGOV to have some financial flexibility, hence zero-debt. 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. I admit this is a fairly basic analysis for EGOV’s financial health. Other important fundamentals need to be considered alongside. You should continue to research NIC to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for EGOV’s future growth? Take a look at our free research report of analyst consensus for EGOV’s outlook.
Valuation: What is EGOV worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether EGOV is currently mispriced by the market.
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.
