Idera Pharmaceuticals Inc (NASDAQ:IDRA), 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 IDRA 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 IDRA has outstanding financial strength. I will take you through a few basic checks to assess the financial health of companies with no debt.

View our latest analysis for Idera Pharmaceuticals

Is IDRA 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. 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. Either IDRA 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. IDRA delivered a negative revenue growth of -95.3%. 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 IDRA’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, Idera Pharmaceuticals 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 US$14.1m liabilities, the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 6.96x. However, a ratio greater than 3x may be considered as too high, as IDRA could be holding too much capital in a low-return investment environment.

Next Steps:

As a high-growth company, it may be beneficial for IDRA to have some financial flexibility, hence zero-debt. Since there is also no concerns around IDRA’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. Keep in mind I haven’t considered other factors such as how IDRA has been performing in the past. You should continue to research Idera Pharmaceuticals to get a better picture of the stock by looking at: