Advertisement
UK markets close in 7 hours 21 minutes
  • FTSE 100

    7,956.12
    +24.14 (+0.30%)
     
  • FTSE 250

    19,783.20
    -27.46 (-0.14%)
     
  • AIM

    741.88
    -0.23 (-0.03%)
     
  • GBP/EUR

    1.1682
    +0.0013 (+0.11%)
     
  • GBP/USD

    1.2600
    -0.0038 (-0.30%)
     
  • Bitcoin GBP

    56,224.41
    +961.15 (+1.74%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • S&P 500

    5,248.49
    +44.91 (+0.86%)
     
  • DOW

    39,760.08
    +477.75 (+1.22%)
     
  • CRUDE OIL

    81.85
    +0.50 (+0.61%)
     
  • GOLD FUTURES

    2,195.10
    +4.50 (+0.21%)
     
  • NIKKEI 225

    40,168.07
    -594.66 (-1.46%)
     
  • HANG SENG

    16,541.42
    +148.58 (+0.91%)
     
  • DAX

    18,495.65
    +18.56 (+0.10%)
     
  • CAC 40

    8,237.96
    +33.15 (+0.40%)
     

Is ZEAL Network SE’s (ETR:TIM) Balance Sheet A Threat To Its Future?

The direct benefit for ZEAL Network SE (ETR:TIM), 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 TIM 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 go over a basic overview of the stock’s financial health, which I believe provides a ballpark estimate of their financial health status.

View our latest analysis for ZEAL Network

Is TIM right in choosing financial flexibility over lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 TIM 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. A single-digit revenue growth of 5.8% for TIM 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.

XTRA:TIM Historical Debt October 15th 18
XTRA:TIM Historical Debt October 15th 18

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

Given zero long-term debt on its balance sheet, ZEAL Network 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. Looking at TIM’s most recent €30m liabilities, it appears that the company has been able to meet these commitments with a current assets level of €143m, leading to a 4.77x current account ratio. Having said that, many consider anything above 3x to be quite high and could mean that TIM has too much idle capital in low-earning investments.

Next Steps:

Having no debt on the books means TIM 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. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how TIM has been performing in the past. You should continue to research ZEAL Network to get a more holistic view of the stock by looking at:

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

  2. Valuation: What is TIM 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 TIM 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.