Yahoo Finance Is Alpha Financial Markets Consulting plc’s (LON:AFM) Balance Sheet Strong Enough To Weather A Storm?
Alpha Financial Markets Consulting plc (LON:AFM), 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 AFM will have to follow strict debt obligations which will reduce its financial flexibility. While AFM has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess AFM’s financial health.
View our latest analysis for Alpha Financial Markets Consulting
Is AFM right in choosing financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. But the downside of having debt in a company’s balance sheet is the debtholder’s higher claim on its assets in the case of liquidation, as well as stricter capital management requirements. Either AFM does not have access to cheap capital, or it may believe this trade-off is not worth it. This makes sense only if the company has a competitive edge and is growing fast off its equity capital. AFM’s revenue growth over the past year is an impressively high double-digit 56%. 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.
Does AFM’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Alpha Financial Markets Consulting 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. At the current liabilities level of UK£20m liabilities, the company has been able to meet these obligations given the level of current assets of UK£31m, with a current ratio of 1.53x. For Professional Services 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:
As a high-growth company, it may be beneficial for AFM to have some financial flexibility, hence zero-debt. Since there is also no concerns around AFM’s liquidity needs, this may be its optimal capital structure for the time being. In the future, AFM’s financial situation may change. Keep in mind I haven’t considered other factors such as how AFM has been performing in the past. I suggest you continue to research Alpha Financial Markets Consulting to get a more holistic view of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for AFM’s future growth? Take a look at our free research report of analyst consensus for AFM’s outlook.
Valuation: What is AFM 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 AFM 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.
