Data Deposit Box Inc (FRA:2DD): Time For A Financial Health Check

The direct benefit for Data Deposit Box Inc (FRA:2DD), 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 2DD will have to adhere to stricter debt covenants and have less financial flexibility. While 2DD has no debt on its balance sheet, it doesn’t necessarily mean it exhibits 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 Data Deposit Box

Is 2DD right in choosing financial flexibility over lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. Either 2DD 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. 2DD delivered a negative revenue growth of -25%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.

DB:2DD Historical Debt November 1st 18

Can 2DD pay its short-term liabilities?

Since Data Deposit Box 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. With current liabilities at CA$68k, it appears that the company has been able to meet these obligations given the level of current assets of CA$1m, with a current ratio of 20.58x. However, anything above 3x may be considered excessive by some investors.

Next Steps:

Having no debt on the books means 2DD has more financial freedom to keep growing at its current fast rate. 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 2DD’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Data Deposit Box to get a more holistic view of the stock by looking at:

1. Historical Performance: What has 2DD’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.

2. 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.