Yahoo Finance 500com Limited (NYSE:WBAI): Time For A Financial Health Check
500com Limited (NYSE:WBAI), 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 WBAI will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean WBAI has outstanding financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
View our latest analysis for 500.com
Is WBAI right in choosing financial flexibility over lower cost of capital?
Debt capital generally has lower cost of capital compared to equity funding. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on WBAI’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 WBAI is a high-growth company. WBAI’s revenue growth over the past year was an impressively high triple-digit rate, 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.
Does WBAI’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, 500.com 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 CN¥93m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.19x. However, anything above 3x may be considered excessive by some investors. They might argue WBAI is leaving too much capital in low-earning investments.
Next Steps:
Having no debt on the books means WBAI has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around WBAI’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure WBAI has company-specific issues impacting its capital structure decisions. I suggest you continue to research 500.com to get a better picture of the stock by looking at:
Historical Performance: What has WBAI’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.
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.
