David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. It’s natural to consider a company’s balance sheet when looking at its riskiness, as debt is often involved when a company fails. Mostly, Qt Group Oyj (HEL:QTCOM) is in debt. But should shareholders worry about its use of debt?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. By replacing dilution, however, debt can be a great tool for companies that need capital to invest in growth at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for Qt Group Oyj
What is Qt Group Oyj’s net debt?
You can click on the graph below for historical figures, but it shows that in December 2021, Qt Group Oyj had debt of €15.0 million, an increase from zero, year on year. But he also has €17.4m in cash to offset that, meaning he has €2.37m in net cash.
How strong is Qt Group Oyj’s balance sheet?
Zooming in on the latest balance sheet data, we can see that Qt Group Oyj had liabilities of €52.1m due within 12 months and liabilities of €13.5m due beyond. In return for these obligations, it had cash of €17.4 million as well as receivables worth €43.1 million at less than 12 months. Its liabilities therefore total €5.14 million more than the combination of its cash and short-term receivables.
Considering the size of Qt Group Oyj, it appears that its liquid assets are well balanced against its total liabilities. It is therefore very unlikely that the 2.83 billion euro company will run out of cash, but it is still worth keeping an eye on the balance sheet. Although it has liabilities to note, Qt Group Oyj also has more cash than debt, so we are quite confident that it can manage its debt safely.
On top of that, Qt Group Oyj has increased its EBIT by 71% over the last twelve months, and this growth will make it easier to manage its debt. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine Qt Group Oyj’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.
Finally, a company can only repay its debts with cold hard cash, not with book profits. Although Qt Group Oyj has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how fast it’s building (or erodes) this cash balance. Over the past three years, Qt Group Oyj has recorded free cash flow of 71% of its EBIT, which is about normal, given that free cash flow excludes interest and taxes. This cold hard cash allows him to reduce his debt whenever he wants.
We can understand that investors are worried about the liabilities of Qt Group Oyj, but we can take comfort in the fact that it has a net cash position of 2.37 million euros. And it has impressed us with its 71% EBIT growth over the past year. We therefore do not believe that Qt Group Oyj’s use of debt is risky. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist outside of the balance sheet. These risks can be difficult to spot. Every business has them, and we’ve spotted 1 warning sign for Qt Group Oyj you should know.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.