Qt Group Oyj (HEL:QTCOM) Could Easily Take On More Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Qt Group Oyj (HEL:QTCOM) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Qt Group Oyj

How Much Debt Does Qt Group Oyj Carry?

The image below, which you can click on for greater detail, shows that Qt Group Oyj had debt of €16.3m at the end of December 2023, a reduction from €24.2m over a year. But it also has €33.6m in cash to offset that, meaning it has €17.3m net cash.

How Strong Is Qt Group Oyj's Balance Sheet?

The latest balance sheet data shows that Qt Group Oyj had liabilities of €57.0m due within a year, and liabilities of €27.2m falling due after that. On the other hand, it had cash of €33.6m and €67.8m worth of receivables due within a year. So it can boast €17.3m more liquid assets than total liabilities.

This state of affairs indicates that Qt Group Oyj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.91b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Qt Group Oyj has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Qt Group Oyj has been able to increase its EBIT by 27% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Qt Group Oyj 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Qt Group Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, Qt Group Oyj recorded free cash flow of 43% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Qt Group Oyj has net cash of €17.3m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 27% over the last year. So is Qt Group Oyj's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Qt Group Oyj that you should be aware of.

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.