Yahoo Finance What does Nanotech Security Corp’s (CVE:NTS) Balance Sheet Tell Us About Its Future?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Nanotech Security Corp (CVE:NTS), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean NTS 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.
Check out our latest analysis for Nanotech Security
Is NTS growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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 NTS 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. NTS’s revenue growth over the past year was an impressively high triple-digit rate, so it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can NTS pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Nanotech Security 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 CA$1.5m liabilities, the company has been able to meet these commitments with a current assets level of CA$10.8m, leading to a 7.35x current account ratio. However, anything about 3x may be excessive, since NTS may be leaving too much capital in low-earning investments.
Next Steps:
As a high-growth company, it may be beneficial for NTS to have some financial flexibility, hence zero-debt. Since there is also no concerns around NTS’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure NTS has company-specific issues impacting its capital structure decisions. I suggest you continue to research Nanotech Security to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for NTS’s future growth? Take a look at our free research report of analyst consensus for NTS’s outlook.
Valuation: What is NTS 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 NTS 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.
