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 QAD Inc. (NASDAQ:QADA) 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 is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.
What Is QAD’s Debt?
The image below, which you can click on for greater detail, shows that at October 2019 QAD had debt of US$13.2m, up from US$13.4 in one year. However, its balance sheet shows it holds US$133.8m in cash, so it actually has US$120.6m net cash.
A Look At QAD’s Liabilities
We can see from the most recent balance sheet that QAD had liabilities of US$126.5m falling due within a year, and liabilities of US$31.5m due beyond that. On the other hand, it had cash of US$133.8m and US$43.0m worth of receivables due within a year. So it actually has US$18.8m more liquid assets than total liabilities.
This state of affairs indicates that QAD’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 US$1.04b company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, QAD boasts net cash, so it’s fair to say it does not have a heavy debt load! There’s no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine QAD’s ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, QAD made a loss at the EBIT level, and saw its revenue drop to US$315m, which is a fall of 4.9%. We would much prefer see growth.
So How Risky Is QAD?
While QAD lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$5.0m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we’re don’t find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how QAD’s profit, revenue, and operating cashflow have changed over the last few years.
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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