Quickstep Holdings (ASX:QHL) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Quickstep Holdings Limited (ASX:QHL) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Quickstep Holdings

What Is Quickstep Holdings's Net Debt?

As you can see below, at the end of December 2022, Quickstep Holdings had AU$14.2m of debt, up from AU$6.89m a year ago. Click the image for more detail. However, it also had AU$2.74m in cash, and so its net debt is AU$11.5m.

How Healthy Is Quickstep Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Quickstep Holdings had liabilities of AU$28.6m due within 12 months and liabilities of AU$27.6m due beyond that. Offsetting these obligations, it had cash of AU$2.74m as well as receivables valued at AU$18.7m due within 12 months. So its liabilities total AU$34.7m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the AU$20.4m company, like a colossus towering over mere mortals. 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 it is Quickstep Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Quickstep Holdings had a loss before interest and tax, and actually shrunk its revenue by 6.8%, to AU$85m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Quickstep Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable AU$3.0m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through AU$5.3m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. 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...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.