Would Questerre Energy (TSE:QEC) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Questerre Energy Corporation (TSE:QEC) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Questerre Energy

What Is Questerre Energy's Net Debt?

The image below, which you can click on for greater detail, shows that Questerre Energy had debt of CA$16.2m at the end of September 2020, a reduction from CA$17.0m over a year. On the flip side, it has CA$10.7m in cash leading to net debt of about CA$5.51m.

A Look At Questerre Energy's Liabilities

Zooming in on the latest balance sheet data, we can see that Questerre Energy had liabilities of CA$20.8m due within 12 months and liabilities of CA$22.6m due beyond that. On the other hand, it had cash of CA$10.7m and CA$2.03m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CA$30.7m.

While this might seem like a lot, it is not so bad since Questerre Energy has a market capitalization of CA$79.1m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Questerre Energy's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Questerre Energy had a loss before interest and tax, and actually shrunk its revenue by 21%, to CA$23m. That makes us nervous, to say the least.

Caveat Emptor

Not only did Questerre Energy'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 CA$56m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CA$3.1m of cash over the last year. So suffice it to say we do 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. Case in point: We've spotted 3 warning signs for Questerre Energy you should be aware of.

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. 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.
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