U.S. Markets open in 7 hrs 50 mins

Is Q-Free ASA's (OB:QFR) Balance Sheet A Threat To Its Future?

Simply Wall St

Want to participate in a short research study? Help shape the future of investing tools and you could win a $250 gift card!

Q-Free ASA (OB:QFR) is a small-cap stock with a market capitalization of øre669m. While investors primarily focus on the growth potential and competitive landscape of the small-cap companies, they end up ignoring a key aspect, which could be the biggest threat to its existence: its financial health. Why is it important? Given that QFR is not presently profitable, it’s crucial to evaluate the current state of its operations and pathway to profitability. Let's work through some financial health checks you may wish to consider if you're interested in this stock. However, this is not a comprehensive overview, so I suggest you dig deeper yourself into QFR here.

Does QFR Produce Much Cash Relative To Its Debt?

QFR has shrunk its total debt levels in the last twelve months, from øre355m to øre312m – this includes long-term debt. With this debt repayment, the current cash and short-term investment levels stands at øre102m to keep the business going. Additionally, QFR has generated cash from operations of øre184m over the same time period, leading to an operating cash to total debt ratio of 59%, meaning that QFR’s debt is appropriately covered by operating cash.

Can QFR meet its short-term obligations with the cash in hand?

Looking at QFR’s øre327m in current liabilities, it seems that the business has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.29x. The current ratio is the number you get when you divide current assets by current liabilities. For Electronic companies, this ratio is within a sensible range since there's a sufficient cash cushion without leaving too much capital idle or in low-earning investments.

OB:QFR Historical Debt, June 18th 2019

Does QFR face the risk of succumbing to its debt-load?

QFR is a relatively highly levered company with a debt-to-equity of 67%. This is somewhat unusual for small-caps companies, since lenders are often hesitant to provide attractive interest rates to less-established businesses. Though, since QFR is currently unprofitable, sustainability of its current state of operations becomes a concern. Maintaining a high level of debt, while revenues are still below costs, can be dangerous as liquidity tends to dry up in unexpected downturns.

Next Steps:

QFR’s high cash coverage means that, although its debt levels are high, the company is able to utilise its borrowings efficiently in order to generate cash flow. This may mean this is an optimal capital structure for the business, given that it is also meeting its short-term commitment. Keep in mind I haven't considered other factors such as how QFR has been performing in the past. I suggest you continue to research Q-Free to get a more holistic view of the small-cap by looking at:

  1. Valuation: What is QFR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether QFR is currently mispriced by the market.
  2. Historical Performance: What has QFR's returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.