The direct benefit for InDex Pharmaceuticals Holding AB (publ) (STO:INDEX), 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 INDEX 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.

See our latest analysis for InDex Pharmaceuticals Holding

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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on INDEX’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 INDEX is a high-growth company. Opposite to the high growth we were expecting, INDEX’s negative revenue growth of -1.6% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.

Can INDEX pay its short-term liabilities?

Given zero long-term debt on its balance sheet, InDex Pharmaceuticals Holding has no solvency issues, which is 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. With current liabilities at kr22m, it seems that the business has been able to meet these obligations given the level of current assets of kr67m, with a current ratio of 3.01x. Having said that, many consider a ratio above 3x to be high.

Next Steps:

INDEX is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around INDEX’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how INDEX has been performing in the past. I recommend you continue to research InDex Pharmaceuticals Holding to get a more holistic view of the stock by looking at:

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

2. Valuation: What is INDEX 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 INDEX is currently mispriced by the market.

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.

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.