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What You Must Know About Arcontech Group Plc’s (LON:ARC) Financial Strength

Arcontech Group Plc (LON:ARC), 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 ARC will have to follow strict debt obligations which will reduce its financial flexibility. While ARC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.

Check out our latest analysis for Arcontech Group

Is financial flexibility worth the lower cost of capital?

Debt capital generally has lower cost of capital compared to equity funding. 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. The lack of debt on ARC’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 ARC is a high-growth company. A single-digit revenue growth of 9.2% for ARC is considerably low for a small-cap company. While its low growth hardly justifies opting for zero-debt, the company may have high growth projects in the pipeline to justify the trade-off.

AIM:ARC Historical Debt September 24th 18
AIM:ARC Historical Debt September 24th 18

Does ARC’s liquid assets cover its short-term commitments?

Since Arcontech 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. With current liabilities at UK£1.9m, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.86x. For Internet companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.

Next Steps:

ARC is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. 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 ARC has been performing in the past. I recommend you continue to research Arcontech Group to get a more holistic view of the stock by looking at:

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  1. Future Outlook: What are well-informed industry analysts predicting for ARC’s future growth? Take a look at our free research report of analyst consensus for ARC’s outlook.

  2. Valuation: What is ARC 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 ARC is currently mispriced by the market.

  3. 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.