Yahoo Finance Is Prodigy Ventures Inc’s (CVE:PGV) Balance Sheet Strong Enough To Weather A Storm?
The direct benefit for Prodigy Ventures Inc (CVE:PGV), 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 PGV will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess PGV’s financial health.
See our latest analysis for Prodigy Ventures
Is financial flexibility worth the lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. PGV’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. PGV’s revenue growth in the teens of 15.6% is not considered as high-growth, especially for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.
Can PGV pay its short-term liabilities?
Given zero long-term debt on its balance sheet, Prodigy Ventures has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. With current liabilities at CA$2.0m, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.23x. Usually, for IT companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.
Next Steps:
Having no debt on the books means PGV has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around PGV’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how PGV has been performing in the past. I recommend you continue to research Prodigy Ventures to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for PGV’s future growth? Take a look at our free research report of analyst consensus for PGV’s outlook.
Historical Performance: What has PGV’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.
