Is Quickstep Holdings (ASX:QHL) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Quickstep Holdings Limited (ASX:QHL) does have debt on its balance sheet. 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. 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. 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 Debt?

The image below, which you can click on for greater detail, shows that Quickstep Holdings had debt of AU$12.7m at the end of December 2023, a reduction from AU$14.2m over a year. However, it does have AU$5.48m in cash offsetting this, leading to net debt of about AU$7.22m.

How Strong Is Quickstep Holdings' Balance Sheet?

We can see from the most recent balance sheet that Quickstep Holdings had liabilities of AU$44.0m falling due within a year, and liabilities of AU$19.8m due beyond that. Offsetting these obligations, it had cash of AU$5.48m as well as receivables valued at AU$26.3m due within 12 months. So it has liabilities totalling AU$32.1m more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the AU$12.2m 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 definitely think shareholders need to watch this one closely. 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 you can't view debt in total isolation; since Quickstep Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Quickstep Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to AU$101m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Quickstep Holdings had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at AU$792k. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely since it is low on liquid assets, and made a loss of AU$3.6m in the last year. So we think this stock is quite risky. We'd prefer to pass. 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 Quickstep Holdings is showing 2 warning signs in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com