These 4 Measures Indicate That Queen's Road Capital Investment (CVE:QRC) Is Using Debt Reasonably Well
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Queen's Road Capital Investment Ltd. (CVE:QRC) makes use of debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Queen's Road Capital Investment
What Is Queen's Road Capital Investment's Net Debt?
As you can see below, at the end of February 2022, Queen's Road Capital Investment had US$16.4m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds US$80.7m in cash, so it actually has US$64.3m net cash.
How Strong Is Queen's Road Capital Investment's Balance Sheet?
According to the balance sheet data, Queen's Road Capital Investment had liabilities of US$17.0m due within 12 months, but no longer term liabilities. On the other hand, it had cash of US$80.7m and US$621.5k worth of receivables due within a year. So it can boast US$64.2m more liquid assets than total liabilities.
This excess liquidity suggests that Queen's Road Capital Investment is taking a careful approach to debt. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Queen's Road Capital Investment boasts net cash, so it's fair to say it does not have a heavy debt load!
On the other hand, Queen's Road Capital Investment's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Queen's Road Capital Investment will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Queen's Road Capital Investment may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Queen's Road Capital Investment recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.
Summing up
While we empathize with investors who find debt concerning, you should keep in mind that Queen's Road Capital Investment has net cash of US$64.3m, as well as more liquid assets than liabilities. So we are not troubled with Queen's Road Capital Investment's debt use. 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. Case in point: We've spotted 2 warning signs for Queen's Road Capital Investment you should be aware of.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.
