Novita Healthcare Limited (ASX:NHL): Time For A Financial Health Check
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Zero-debt allows substantial financial flexibility, especially for small-cap companies like Novita Healthcare Limited (ASX:NHL), 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. 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 recommend you look at the following hurdles to assess NHL’s financial health.
See our latest analysis for Novita Healthcare
Does NHL’s growth rate justify its decision for financial flexibility over lower cost of capital?
Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 NHL’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 NHL is a high-growth company. NHL delivered a negative revenue growth of -1.6%. 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.
Does NHL’s liquid assets cover its short-term commitments?
Since Novita Healthcare 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$838k, it seems that the business has been able to meet these obligations given the level of current assets of AU$2.0m, with a current ratio of 2.4x. Usually, for Healthcare Services companies, this is a suitable ratio as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
NHL 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 NHL’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how NHL has been performing in the past. I recommend you continue to research Novita Healthcare to get a better picture of the stock by looking at:
Historical Performance: What has NHL’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.
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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.
