Here's Why Questerre Energy (TSE:QEC) Can Afford Some Debt

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. We can see that Questerre Energy Corporation (TSE:QEC) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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.

See our latest analysis for Questerre Energy

How Much Debt Does Questerre Energy Carry?

As you can see below, at the end of June 2020, Questerre Energy had CA$19.3m of debt, up from CA$14.7m a year ago. Click the image for more detail. However, because it has a cash reserve of CA$13.7m, its net debt is less, at about CA$5.59m.

How Healthy Is Questerre Energy's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Questerre Energy had liabilities of CA$25.3m due within 12 months and liabilities of CA$22.4m due beyond that. Offsetting this, it had CA$13.7m in cash and CA$2.29m in receivables that were due within 12 months. So its liabilities total CA$31.7m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CA$47.0m, so it does suggest shareholders should keep an eye on Questerre Energy's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Questerre Energy 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.

In the last year Questerre Energy's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Questerre Energy produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CA$54m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$5.6m of cash over the last year. So in short it's a really risky stock. 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. Case in point: We've spotted 2 warning signs for Questerre Energy 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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