Yahoo Finance Are Speciality Metals International Limited’s (ASX:SEI) Interest Costs Too High?
The direct benefit for Speciality Metals International Limited (ASX:SEI), 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 SEI will have to adhere to stricter debt covenants and have less financial flexibility. 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.
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Is SEI growing fast enough to value financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. The lack of debt on SEI’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 SEI is a high-growth company. A single-digit revenue growth of 9.7% for SEI is considerably low for a small-cap company. More capital can help the business grow faster. If SEI is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can SEI meet its short-term obligations with the cash in hand?
Since Speciality Metals International 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 AU$191k, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 7.82x. Having said that, a ratio above 3x may be considered excessive by some investors.
Next Steps:
As a high-growth company, it may be beneficial for SEI 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. Moving forward, its financial position may change. This is only a rough assessment of financial health, and I’m sure SEI has company-specific issues impacting its capital structure decisions. I suggest you continue to research Speciality Metals International to get a better picture of the stock by looking at:
Historical Performance: What has SEI’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.
