Yahoo Finance Is Ceres Power Holdings plc (LON:CWR) A Financially Sound Company?
The direct benefit for Ceres Power Holdings plc (LON:CWR), 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 CWR will have to adhere to stricter debt covenants and have less financial flexibility. While CWR 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 CWR’s financial health.
See our latest analysis for Ceres Power Holdings
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. 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 CWR 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. CWR delivered a strikingly high triple-digit revenue growth over the past year, 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.
Can CWR meet its short-term obligations with the cash in hand?
Given zero long-term debt on its balance sheet, Ceres Power Holdings has no solvency issues, which is 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£4.3m, the company has been able to meet these commitments with a current assets level of UK£14m, leading to a 3.37x current account ratio. However, many consider a ratio above 3x to be high.
Next Steps:
Having no debt on the books means CWR has more financial freedom to keep growing at its current fast rate. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Going forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how CWR has been performing in the past. You should continue to research Ceres Power Holdings to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for CWR’s future growth? Take a look at our free research report of analyst consensus for CWR’s outlook.
Historical Performance: What has CWR’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.
