Does CAQ Holdings (ASX:CAQ) Have A Healthy Balance Sheet?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that CAQ Holdings Limited (ASX:CAQ) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. 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 CAQ Holdings

How Much Debt Does CAQ Holdings Carry?

As you can see below, at the end of December 2023, CAQ Holdings had AU$3.43m of debt, up from AU$3.21m a year ago. Click the image for more detail. However, it does have AU$720.0k in cash offsetting this, leading to net debt of about AU$2.71m.

How Strong Is CAQ Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CAQ Holdings had liabilities of AU$2.97m due within 12 months and liabilities of AU$5.23m due beyond that. Offsetting this, it had AU$720.0k in cash and AU$78.8k in receivables that were due within 12 months. So its liabilities total AU$7.41m more than the combination of its cash and short-term receivables.

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. 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 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 30%, to AU$2.6m. 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). Its EBIT loss was a whopping AU$879k. 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 had negative free cash flow of AU$378k over the last twelve months. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 5 warning signs we've spotted with CAQ Holdings (including 4 which can't be ignored) .

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.