Yahoo Finance How Financially Strong Is AB Dynamics Plc (LON:ABDP)?
The direct benefit for AB Dynamics Plc (LON:ABDP), 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 ABDP 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 will take you through a few basic checks to assess the financial health of companies with no debt.
View our latest analysis for AB Dynamics
Does ABDP’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. 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 ABDP’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 ABDP is a high-growth company. ABDP’s revenue growth over the past year is a double-digit 35% 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 ABDP’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, AB Dynamics 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. Looking at ABDP’s most recent UK£10m liabilities, it appears that the company has been able to meet these commitments with a current assets level of UK£29m, leading to a 2.84x current account ratio. For Auto Components companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too much capital in low return investments.
Next Steps:
Having no debt on the books means ABDP has more financial freedom to keep growing at its current fast rate. Since there is also no concerns around ABDP’s liquidity needs, this may be its optimal capital structure for the time being. Going forward, its financial position may change. Keep in mind I haven’t considered other factors such as how ABDP has been performing in the past. I suggest you continue to research AB Dynamics to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for ABDP’s future growth? Take a look at our free research report of analyst consensus for ABDP’s outlook.
Valuation: What is ABDP 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 ABDP 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.
