The stock of Xunlei Ltd (NASDAQ:XNET) closed at $18.95 losing 4.24% in yesterday’s trading session. Xunlei is rather good in the balancing act and that comes out clearly looking at its zero-debt on its balance sheet.
The best thing about having a Zero-debt lies in the fact that it is possible to alleviate the risk that pulls along with a given company meeting up to its debt obligations. However, that it would be wrong for anyone to purport that XNET has outstanding financial strength.
The company’s spokesperson opined, “Can maximize capital returns by increasing debt due to its lower cost of capital. However, the trade-off is XNET will have to follow strict debt obligations which will reduce its financial flexibility.”
There is great need for XNET to grow fast enough in such a way that it will be able to value financial flexibility over the lower cost capital. But what is the importance of including debt in capital structure? What is the downside when it occurs that there is debt? In such an instance, stricter capital management requirements come into play not forgetting the debtholder’s higher claim on assets during the liquidation phase.
XNET believes that the lack of access to cheaper capital might be one of the reasons behind the absence of debt on its balance sheet. The other reason it gave was that it might have resulted from the fact that it took the standpoint that low cost wasn’t in any way to be prioritized over financial flexibility.
But a much closer outlook inspires one to think more critically and that is the exact moment when it dawns on one that choosing flexibility over capital returns is only a matter of logic. Basically, a double-digit revenue growth of 20.46% is seen by many as a relatively high for a small-cap company such as the XNET. The company’s resolve to settle upon financial flexibility is seen by market experts as something that is justifiable. However, they agree on the point that it might require headroom to borrow in the future in order to ensure that it sustains a high level growth.