Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Qeeka Home (Cayman) Inc. (HKG:1739) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Qeeka Home (Cayman) Carry?
As you can see below, Qeeka Home (Cayman) had CN¥12.0m of debt at June 2019, down from CN¥874.1m a year prior. But on the other hand it also has CN¥1.15b in cash, leading to a CN¥1.14b net cash position.
How Strong Is Qeeka Home (Cayman)'s Balance Sheet?
According to the last reported balance sheet, Qeeka Home (Cayman) had liabilities of CN¥633.6m due within 12 months, and liabilities of CN¥15.8m due beyond 12 months. Offsetting this, it had CN¥1.15b in cash and CN¥119.5m in receivables that were due within 12 months. So it can boast CN¥623.0m more liquid assets than total liabilities.
This surplus suggests that Qeeka Home (Cayman) is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Qeeka Home (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!
It was also good to see that despite losing money on the EBIT line last year, Qeeka Home (Cayman) turned things around in the last 12 months, delivering and EBIT of CN¥11m. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Qeeka Home (Cayman) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. Qeeka Home (Cayman) 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. During the last year, Qeeka Home (Cayman) burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.
While it is always sensible to investigate a company's debt, in this case Qeeka Home (Cayman) has CN¥1.14b in net cash and a decent-looking balance sheet. So we are not troubled with Qeeka Home (Cayman)'s debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Be aware that Qeeka Home (Cayman) is showing 3 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...
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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