JNBY Design Limited (HKG:3306): Time For A Financial Health Check
Zero-debt allows substantial financial flexibility, especially for small-cap companies like JNBY Design Limited (HKG:3306), 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 3306 has outstanding financial strength. I recommend you look at the following hurdles to assess 3306’s financial health.
View our latest analysis for JNBY Design
Does 3306’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. The lack of debt on 3306’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 3306 is a high-growth company. 3306’s revenue growth over the past year is a double-digit 23% which is considerably high for a small-cap company. Therefore, the company’s decision to choose financial flexibility is justified as it may need headroom to borrow in the future to sustain high growth.
Can 3306 meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, JNBY Design 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 CN¥823m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 2.19x. For Luxury companies, this ratio is within a sensible range 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 3306 has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around 3306’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. Keep in mind I haven’t considered other factors such as how 3306 has been performing in the past. I suggest you continue to research JNBY Design to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 3306’s future growth? Take a look at our free research report of analyst consensus for 3306’s outlook.
Valuation: What is 3306 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 3306 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.
