Yahoo Finance What does 8×8 Inc’s (NYSE:EGHT) Balance Sheet Tell Us About Its Future?
The direct benefit for 8×8 Inc (NYSE:EGHT), 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 EGHT 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 EGHT has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Check out our latest analysis for 8×8
Is financial flexibility worth the 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. Either EGHT 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. EGHT’s revenue growth in the teens of 18% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If EGHT is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Does EGHT’s liquid assets cover its short-term commitments?
Since 8×8 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 US$61m liabilities, it seems that the business has been able to meet these commitments with a current assets level of US$186m, leading to a 3.06x current account ratio. However, anything above 3x may be considered excessive by some investors.
Next Steps:
EGHT is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. 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 change. This is only a rough assessment of financial health, and I’m sure EGHT has company-specific issues impacting its capital structure decisions. You should continue to research 8×8 to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for EGHT’s future growth? Take a look at our free research report of analyst consensus for EGHT’s outlook.
Historical Performance: What has EGHT’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.
