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Is Wuxi Sunlit Science and Technology Company Limited’s (HKG:1289) Balance Sheet Strong Enough To Weather A …


The direct benefit for Wuxi Sunlit Science and Technology Company Limited (HKG:1289), 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 1289 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 1289 has outstanding financial strength.
I will take you through a few basic checks to assess the financial health of companies with no debt.



Check out our latest analysis for Wuxi Sunlit Science and Technology

Is 1289 right in choosing financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding.
However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management.
The lack of debt on 1289’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 1289 is a high-growth company.
1289 delivered a strikingly high revenue growth of 73.0% over the past year.
Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.


SEHK:1289 Historical Debt September 12th 18
SEHK:1289 Historical Debt September 12th 18

Can 1289 meet its short-term obligations with the cash in hand?

Since Wuxi Sunlit Science and Technology 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.
With current liabilities at CN¥113.2m,
it seems that the business
has been able to meet these commitments with a current assets level of CN¥581.9m, leading to a 5.14x current account ratio.
However,
anything about 3x may be excessive, since 1289 may be leaving too much capital in low-earning investments.

Next Steps:

Having no debt on the books means 1289 has more financial freedom to keep growing at its current fast rate.
Since there is also no concerns around 1289’s liquidity needs, this may be its optimal capital structure for the time being.
Moving forward,
its financial position may change.
This is only a rough assessment of financial health, and I’m sure 1289 has company-specific issues impacting its capital structure decisions.
I recommend you
continue to research Wuxi Sunlit Science and Technology to get a
more holistic view
of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for 1289’s future growth? Take a look at our free research report of analyst consensus for 1289’s outlook.
  2. Valuation: What is 1289 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 1289 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.

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