Yahoo Finance How Financially Strong Is ImpediMed Limited (ASX:IPD)?
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The direct benefit for ImpediMed Limited (ASX:IPD), 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 IPD 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 IPD has outstanding 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.
Check out our latest analysis for ImpediMed
Is IPD growing fast enough to value financial flexibility over 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. Either IPD 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. IPD delivered a negative revenue growth of -17%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does IPD’s liquid assets cover its short-term commitments?
Since ImpediMed 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. At the current liabilities level of AU$5.7m, the company has been able to meet these commitments with a current assets level of AU$38m, leading to a 6.67x current account ratio. Having said that, many consider a ratio above 3x to be high.
Next Steps:
Having no debt on the books means IPD has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around IPD’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, IPD’s financial situation may change. I admit this is a fairly basic analysis for IPD’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research ImpediMed to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for IPD’s future growth? Take a look at our free research report of analyst consensus for IPD’s outlook.
Historical Performance: What has IPD’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.
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If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. On rare occasion, data errors may occur. Thank you for reading.
