Yahoo Movies Is Intevac Inc’s (NASDAQ:IVAC) Balance Sheet A Threat To Its Future?
The direct benefit for Intevac Inc (NASDAQ:IVAC), 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 IVAC will have to adhere to stricter debt covenants and have less financial flexibility. While IVAC has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.
Check out our latest analysis for Intevac
Is IVAC growing fast enough to value 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 IVAC 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. IVAC delivered a negative revenue growth of -15.3%. While its negative growth hardly justifies opting for zero-debt, if the decline sustains, it may find it hard to raise debt at an acceptable cost.
Does IVAC’s liquid assets cover its short-term commitments?
Given zero long-term debt on its balance sheet, Intevac 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 IVAC’s most recent US$31.1m liabilities, the company has been able to meet these commitments with a current assets level of US$94.0m, leading to a 3.02x current account ratio. Though, anything about 3x may be excessive, since IVAC may be leaving too much capital in low-earning investments.
Next Steps:
IVAC 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. Moving forward, its financial position may be different. I admit this is a fairly basic analysis for IVAC’s financial health. Other important fundamentals need to be considered alongside. I suggest you continue to research Intevac to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for IVAC’s future growth? Take a look at our free research report of analyst consensus for IVAC’s outlook.
Valuation: What is IVAC 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 IVAC 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.
