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Asia Tele-Net and Technology Corporation Limited (HKG:679), which has zero-debt on its balance sheet, can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is 679 will have to follow strict debt obligations which will reduce its 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 take you through a few basic checks to assess the financial health of companies with no debt.

View our latest analysis for Asia Tele-Net and Technology

Does 679’s growth rate justify its decision for financial flexibility over lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. 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. 679’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. 679 delivered a negative revenue growth of -39%. 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.

Can 679 meet its short-term obligations with the cash in hand?

Given zero long-term debt on its balance sheet, Asia Tele-Net and Technology 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 679’s HK$242m in current liabilities, it seems that the business has been able to meet these obligations given the level of current assets of HK$451m, with a current ratio of 1.87x. Generally, for Machinery companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

Having no debt on the books means 679 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around 679’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure 679 has company-specific issues impacting its capital structure decisions. I suggest you continue to research Asia Tele-Net and Technology to get a better picture of the stock by looking at:

1. Future Outlook: What are well-informed industry analysts predicting for 679’s future growth? Take a look at our free research report of analyst consensus for 679’s outlook.

2. Historical Performance: What has 679’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.

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.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

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. Thank you for reading.