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

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. As with many other companies CAQ Holdings Limited (ASX:CAQ) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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 think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for CAQ Holdings

What Is CAQ Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 CAQ Holdings had AU$3.76m of debt, an increase on AU$2.75m, over one year. On the flip side, it has AU$443.6k in cash leading to net debt of about AU$3.31m.

How Strong Is CAQ Holdings' Balance Sheet?

The latest balance sheet data shows that CAQ Holdings had liabilities of AU$3.31m due within a year, and liabilities of AU$5.08m falling due after that. Offsetting these obligations, it had cash of AU$443.6k as well as receivables valued at AU$146.3k due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$7.80m.

Given this deficit is actually higher than the company's market capitalization of AU$5.74m, we think shareholders really should watch CAQ Holdings's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CAQ 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 CAQ Holdings had a loss before interest and tax, and actually shrunk its revenue by 31%, to AU$2.3m. To be frank that doesn't bode well.

Caveat Emptor

Not only did CAQ Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable AU$1.1m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it had negative free cash flow of AU$879k over the last twelve months. 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 CAQ Holdings is showing 4 warning signs in our investment analysis , and 3 of those are significant...

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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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.