Yahoo Finance Is SLI Systems Limited’s (NZSE:SLI) Balance Sheet Strong Enough To Weather A Storm?
The direct benefit for SLI Systems Limited (NZSE:SLI), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is SLI will have to adhere to stricter debt covenants and have less financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean SLI has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
View our latest analysis for SLI Systems
Is SLI 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 SLI’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 SLI is a high-growth company. SLI’s revenue growth over the past year is a single-digit 7.2% which is relatively low for a small-cap company. More capital can help the business grow faster. If SLI is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SLI meet its short-term obligations with the cash in hand?
Since SLI Systems 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. 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$9.4m liabilities, it seems that the business has been able to meet these obligations given the level of current assets of NZ$16.7m, with a current ratio of 1.77x. Usually, for Internet 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:
As a high-growth company, it may be beneficial for SLI 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. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure SLI has company-specific issues impacting its capital structure decisions. I suggest you continue to research SLI Systems to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for SLI’s future growth? Take a look at our free research report of analyst consensus for SLI’s outlook.
Valuation: What is SLI 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 SLI 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.
