Yahoo Finance Is Dropsuite Limited’s (ASX:DSE) Balance Sheet A Threat To Its Future?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Dropsuite Limited (ASX:DSE), 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. 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 will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.
See our latest analysis for Dropsuite
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. 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 DSE’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 DSE is a high-growth company. DSE delivered a strikingly high revenue growth of 66% over the past year. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Can DSE meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Dropsuite 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 AU$770k, it seems that the business has been able to meet these obligations given the level of current assets of AU$4.7m, with a current ratio of 6.1x. Having said that, a ratio greater than 3x may be considered high by some.
Next Steps:
As a high-growth company, it may be beneficial for DSE 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. Going forward, DSE’s financial situation may change. This is only a rough assessment of financial health, and I’m sure DSE has company-specific issues impacting its capital structure decisions. You should continue to research Dropsuite to get a better picture of the stock by looking at:
Historical Performance: What has DSE’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.
