Yahoo Finance Is On the Beach Group plc’s (LON:OTB) Balance Sheet Strong Enough To Weather A Storm?
The direct benefit for On the Beach Group plc (LON:OTB), 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 OTB 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 recommend you look at the following hurdles to assess OTB’s financial health.
See our latest analysis for On the Beach Group
Does OTB’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. 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. Either OTB 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. OTB’s revenue growth over the past year is a double-digit 25% which is considerably high for a small-cap company. So, it is acceptable that the company is opting for a zero-debt capital structure currently as it may need to raise debt to fuel expansion in the future.
Does OTB’s liquid assets cover its short-term commitments?
Since On the Beach Group 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. At the current liabilities level of UK£126m, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.25x. Generally, for Online Retail 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 OTB has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around OTB’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may be different. This is only a rough assessment of financial health, and I’m sure OTB has company-specific issues impacting its capital structure decisions. You should continue to research On the Beach Group to get a more holistic view of the stock by looking at:
Valuation: What is OTB 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 OTB is currently mispriced by the market.
Historical Performance: What has OTB’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.
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.
