Advertisement
U.S. markets open in 4 hours 47 minutes
  • S&P Futures

    5,305.00
    -3.25 (-0.06%)
     
  • Dow Futures

    40,127.00
    -17.00 (-0.04%)
     
  • Nasdaq Futures

    18,490.25
    -13.50 (-0.07%)
     
  • Russell 2000 Futures

    2,133.40
    -5.00 (-0.23%)
     
  • Crude Oil

    81.81
    +0.46 (+0.57%)
     
  • Gold

    2,214.70
    +2.00 (+0.09%)
     
  • Silver

    24.55
    -0.20 (-0.82%)
     
  • EUR/USD

    1.0794
    -0.0035 (-0.32%)
     
  • 10-Yr Bond

    4.1960
    0.0000 (0.00%)
     
  • Vix

    12.97
    +0.19 (+1.49%)
     
  • GBP/USD

    1.2608
    -0.0030 (-0.23%)
     
  • USD/JPY

    151.3560
    +0.1100 (+0.07%)
     
  • Bitcoin USD

    70,649.05
    +860.91 (+1.23%)
     
  • CMC Crypto 200

    885.54
    0.00 (0.00%)
     
  • FTSE 100

    7,952.49
    +20.51 (+0.26%)
     
  • Nikkei 225

    40,168.07
    -594.66 (-1.46%)
     

Are Precise Biometrics AB’s (STO:PREC) Interest Costs Too High?

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

The direct benefit for Precise Biometrics AB (STO:PREC), 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 PREC will have to adhere to stricter debt covenants and have less financial flexibility. While PREC 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.

See our latest analysis for Precise Biometrics

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

There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. However, the trade-off is debtholders’ higher claim on company assets in the event of liquidation and stringent obligations around capital management. The lack of debt on PREC’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 PREC is a high-growth company. A single-digit revenue growth of 0.4% for PREC 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.

OM:PREC Historical Debt February 6th 19
OM:PREC Historical Debt February 6th 19

Can PREC pay its short-term liabilities?

Given zero long-term debt on its balance sheet, Precise Biometrics 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 PREC’s kr33m in current liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 3.6x. However, many consider a ratio above 3x to be high.

Next Steps:

As a high-growth company, it may be beneficial for PREC to have some financial flexibility, hence zero-debt. Since there is also no concerns around PREC’s liquidity needs, this may be its optimal capital structure for the time being. In the future, its financial position may change. This is only a rough assessment of financial health, and I’m sure PREC has company-specific issues impacting its capital structure decisions. I recommend you continue to research Precise Biometrics to get a more holistic view of the stock by looking at:

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

  2. Historical Performance: What has PREC’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.

  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.

Advertisement