Yahoo Finance Is Temple & Webster Group Limited’s (ASX:TPW) Balance Sheet A Threat To Its Future?
Zero-debt allows substantial financial flexibility, especially for small-cap companies like Temple & Webster Group Limited (ASX:TPW), 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 TPW 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 Temple & Webster Group
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 TPW’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 TPW is a high-growth company. TPW’s revenue growth in the teens of 13% is not considered as high-growth, especially for a small-cap company. More capital can help the business grow faster. If TPW is not expecting exceptional future growth, then the decision to avoid may cost shareholders in the long term.
Can TPW meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Temple & Webster Group 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. Looking at TPW’s AU$11m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of AU$13m, with a current ratio of 1.25x. Usually, for Online Retail companies, this is a suitable ratio since there’s a sufficient cash cushion without leaving too much capital idle or in low-earning investments.
Next Steps:
Having no debt on the books means TPW has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around TPW’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. I admit this is a fairly basic analysis for TPW’s financial health. Other important fundamentals need to be considered alongside. You should continue to research Temple & Webster Group to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for TPW’s future growth? Take a look at our free research report of analyst consensus for TPW’s outlook.
Valuation: What is TPW 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 TPW is currently mispriced by the market.
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.
