Are Sierra Wireless Inc’s (TSE:SW) Interest Costs Too High?

Zero-debt allows substantial financial flexibility, especially for small-cap companies like Sierra Wireless Inc (TSE:SW), 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 SW has outstanding financial strength. I recommend you look at the following hurdles to assess SW’s financial health.

See our latest analysis for Sierra Wireless

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. 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. Either SW 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. A revenue growth in the teens is not considered high-growth. SW’s revenue growth of 16% falls into this range. More capital can help the business grow faster. If SW is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.

TSX:SW Historical Debt December 5th 18

Does SW’s liquid assets cover its short-term commitments?

Since Sierra Wireless 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. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of US$180m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.69x. Generally, for Communications companies, this is a reasonable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.

Next Steps:

SW 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. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure SW has company-specific issues impacting its capital structure decisions. You should continue to research Sierra Wireless to get a more holistic view of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for SW’s future growth? Take a look at our free research report of analyst consensus for SW’s outlook.

2. Valuation: What is SW 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 SW is currently mispriced by the market.

3. 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.