Yahoo Finance Is Espial Group Inc’s (TSE:ESP) Balance Sheet Strong Enough To Weather A Storm?
The direct benefit for Espial Group Inc (TSE:ESP), 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 ESP 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 ESP has outstanding financial strength. I recommend you look at the following hurdles to assess ESP’s financial health.
Check out our latest analysis for Espial Group
Does ESP’s growth rate justify its decision for 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 ESP’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 ESP is a high-growth company. ESP delivered a negative revenue growth of -15%. 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.
Does ESP’s liquid assets cover its short-term commitments?
Since Espial Group 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. Looking at ESP’s most recent CA$6m 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 6.51x. However, many consider anything above 3x to be quite high.
Next Steps:
As a high-growth company, it may be beneficial for ESP 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 change. I admit this is a fairly basic analysis for ESP’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research Espial Group to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ESP’s future growth? Take a look at our free research report of analyst consensus for ESP’s outlook.
Valuation: What is ESP 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 ESP 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.
