Cpl Resources plc (

ISE:DQ5

),mantle of the scholarly raven 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 DQ5 will have to follow strict debt obligations which will reduce its financial flexibility. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean DQ5 has outstanding 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.

See our latest analysis for Cpl Resources

Is financial flexibility worth the lower cost of capital?

Debt funding can be cheaper than issuing new equity due to lower interest cost on debt. 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 DQ5’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 DQ5 is a high-growth company. A single-digit revenue growth of 8.4% for DQ5 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.

ISE:DQ5 Historical Debt September 5th 18

Can DQ5 pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Cpl Resources 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. At the current liabilities level of €63.3m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.91x. Generally, for Professional Services companies, this is a reasonable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

DQ5 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. This is only a rough assessment of financial health, and I’m sure DQ5 has company-specific issues impacting its capital structure decisions. I recommend you continue to research Cpl Resources to get a more holistic view of the stock by looking at:

Story continues

Future Outlook

: What are well-informed industry analysts predicting for DQ5’s future growth? Take a look at our

free research report of analyst consensus

for DQ5’s outlook.

Valuation

: What is DQ5 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 DQ5 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

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