Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Q Technology (Group) Company Limited (HKG:1478) makes use of debt. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Q Technology (Group)
How Much Debt Does Q Technology (Group) Carry?
As you can see below, at the end of June 2023, Q Technology (Group) had CN¥4.55b of debt, up from CN¥2.56b a year ago. Click the image for more detail. However, it also had CN¥4.12b in cash, and so its net debt is CN¥431.9m.
A Look At Q Technology (Group)'s Liabilities
The latest balance sheet data shows that Q Technology (Group) had liabilities of CN¥8.31b due within a year, and liabilities of CN¥478.1m falling due after that. Offsetting these obligations, it had cash of CN¥4.12b as well as receivables valued at CN¥2.96b due within 12 months. So its liabilities total CN¥1.71b more than the combination of its cash and short-term receivables.
Q Technology (Group) has a market capitalization of CN¥3.98b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Q Technology (Group)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Q Technology (Group) had a loss before interest and tax, and actually shrunk its revenue by 26%, to CN¥12b. That makes us nervous, to say the least.
Caveat Emptor
While Q Technology (Group)'s falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥87m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. On the bright side, we note that trailing twelve month EBIT is worse than the free cash flow of CN¥558m and the profit of CN¥26m. So if we focus on those metrics there seems to be a chance the company will manage its debt without much trouble. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with Q Technology (Group) .
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.