Yahoo Finance Is Shutterstock Inc’s (NYSE:SSTK) Balance Sheet A Threat To Its Future?
Shutterstock Inc (NYSE:SSTK), 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 SSTK 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 will take you through a few basic checks to assess the financial health of companies with no debt.
See our latest analysis for Shutterstock
Does SSTK’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 SSTK 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. SSTK’s revenue growth in the teens of 16.4% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If SSTK is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SSTK pay its short-term liabilities?
Since Shutterstock 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 US$216.0m, it appears that the company has been able to meet these obligations given the level of current assets of US$361.9m, with a current ratio of 1.68x. Generally, for Internet companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Next Steps:
Having no debt on the books means SSTK has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around SSTK’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure SSTK has company-specific issues impacting its capital structure decisions. I recommend you continue to research Shutterstock to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SSTK’s future growth? Take a look at our free research report of analyst consensus for SSTK’s outlook.
Valuation: What is SSTK 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 SSTK 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.
