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Is Ability Inc (NASDAQ:ABIL) As Financially Strong As Its Balance Sheet Indicates?

The direct benefit for Ability Inc (NASDAQ:ABIL), 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 ABIL will have to adhere to stricter debt covenants and have less financial flexibility. While zero-debt makes the due diligence for potential investors less nerve-racking, it poses a new question: how should they assess the financial strength of such companies? I recommend you look at the following hurdles to assess ABIL’s financial health. View our latest analysis for Ability

Is ABIL right in choosing financial flexibility over 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. The lack of debt on ABIL’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 ABIL is a high-growth company. ABIL delivered a negative revenue growth of -68.35%. 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.

NasdaqCM:ABIL Historical Debt Dec 19th 17
NasdaqCM:ABIL Historical Debt Dec 19th 17

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

Given zero long-term debt on its balance sheet, Ability 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 ABIL’s most recent $21.9M liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.38x. Generally, for aerospace & defense companies, this is a reasonable ratio since there’s sufficient cash cushion without leaving too much capital idle or in low-earning investments.

Next Steps:

Are you a shareholder? ABIL’s soft top-line growth means not having any low-cost debt funding may not be optimal for the business. As an investor, you may want to figure out if there are company-specific reasons for not having any debt, and whether the company needs financial flexibility at this point in time. You should take a look into a future growth analysis to examine what the market expects for the company moving forward.

Are you a potential investor? ABIL’s management of short term liabilities is strong. But, its soft revenue growth could hurt returns, meaning there is some benefit to looking at low-cost funding alternatives. This is only a rough assessment of financial health, and I’m sure ABIL has company-specific issues impacting its capital structure decisions. I encourage you to continue your research by taking a look at ABIL’s past performance in order to determine for yourself whether its zero-debt position is justified.


To help readers see pass 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.

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