Is Quickstep Holdings (ASX:QHL) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Quickstep Holdings Limited (ASX:QHL) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Quickstep Holdings

What Is Quickstep Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Quickstep Holdings had AU$13.3m of debt, an increase on AU$9.85m, over one year. On the flip side, it has AU$5.61m in cash leading to net debt of about AU$7.69m.

How Strong Is Quickstep Holdings' Balance Sheet?

We can see from the most recent balance sheet that Quickstep Holdings had liabilities of AU$27.6m falling due within a year, and liabilities of AU$32.9m due beyond that. Offsetting these obligations, it had cash of AU$5.61m as well as receivables valued at AU$23.5m due within 12 months. So its liabilities total AU$31.4m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the AU$16.1m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Quickstep Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Quickstep Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Quickstep Holdings reported revenue of AU$94m, which is a gain of 8.9%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Quickstep Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost AU$945k at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of AU$5.7m didn't encourage us either; we'd like to see a profit. In the meantime, we consider the stock to be risky. 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. We've identified 2 warning signs with Quickstep Holdings (at least 1 which makes us a bit uncomfortable) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.