Zero-debt allows substantial financial flexibility,can guinea pigs have apricots especially for small-cap companies like Quantum Thinking Limited (

HKG:8050

), as the company does not have to adhere to strict debt covenants. However, it also faces higher cost of capital given interest cost is generally lower than equity. Zero-debt can alleviate some risk associated with the company meeting debt obligations, but this doesn’t automatically mean 8050 has outstanding 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 Quantum Thinking

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. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. 8050’s absence of debt on its balance sheet may be due to lack of access to cheaper capital, or it may simply believe low cost is not worth sacrificing financial flexibility. However, choosing flexibility over capital returns is logical only if it’s a high-growth company. A single-digit revenue growth of 8.4% for 8050 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.

SEHK:8050 Historical Debt January 2nd 19

Does 8050’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, Quantum Thinking 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 8050’s HK$117m in current liabilities, it seems that the business has been able to meet these commitments with a current assets level of HK$165m, leading to a 1.41x current account ratio. For Tech 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:

8050 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 change. Keep in mind I haven’t considered other factors such as how 8050 has been performing in the past. I suggest you continue to research Quantum Thinking to get a better picture of the stock by looking at:

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Historical Performance

: What has 8050’s returns been like over the past? Go into more detail in the past track record analysis and take a look at

the free visual representations of our analysis

for more clarity.

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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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