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Ceres Power Holdings

Why Ceres Power Holdings plc Has Zero-Debt On Its Balance Sheet?

Including debt in the capital structure of companies such as Ceres Power Holdings plc (LON:CWR), which has no debt, can improve its capital returns as the cost of capital comes down. The debt is less costly due to relatively less risk born by debt-holders in the event of liquidation. Additionally, interest on debt reduces the tax liability.

A lower cost of capital increases a company’s valuation as it is the discount rate applied on future cash flows to calculate the present value; thus, indicating higher capital returns. Precisely due to the same reason, companies raised debt in their capital structure with costs at record lows in a low interest rate environment. This improved their capital returns and they were rewarded with higher valuations.

On the other hand, rate hikes are imminent, it’s a part of the broader economic cycle. No-debt companies will clearly be in a stronger cash position compared to companies of which most, if not all, will be forced to retire a chunk of their debt due to rising costs. Higher the interest rates, higher the cost of debt. Although zero-debt makes Ceres Power Holdings’s financial strength analysis lot more stressful, there are other metrics to check its financial health. Here’s a small checklist which I believe provides a ballpark estimate of their financial health status…

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.