Is ProSmart Enterprises Inc’s (CVE:PROS) Balance Sheet A Threat To Its Future?

The direct benefit for ProSmart Enterprises Inc (CVE:PROS), 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 PROS will have to adhere to stricter debt covenants and have less financial flexibility. While PROS 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 ProSmart Enterprises

Is financial flexibility worth the lower cost of capital?

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. Either PROS 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.

TSXV:PROS Historical Debt September 26th 18

Can PROS pay its short-term liabilities?

Since ProSmart Enterprises 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$920.2k, the company may not have an easy time meeting these commitments with a current assets level of CA$901.4k, leading to a current ratio of 0.98x.

Next Steps:

PROS is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Though, the company’s low liquidity lowers our confidence around meeting near-term obligations. Some level of low-cost debt funding could help address these needs. Going forward, its financial position may change. I admit this is a fairly basic analysis for PROS’s financial health. Other important fundamentals need to be considered alongside. I recommend you continue to research ProSmart Enterprises to get a more holistic view of the stock by looking at:

1. Historical Performance: What has PROS’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.