SQI Diagnostics (CVE:SQD) 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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies SQI Diagnostics Inc. (CVE:SQD) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for SQI Diagnostics

How Much Debt Does SQI Diagnostics Carry?

The chart below, which you can click on for greater detail, shows that SQI Diagnostics had CA$2.22m in debt in December 2021; about the same as the year before. But on the other hand it also has CA$3.38m in cash, leading to a CA$1.16m net cash position.

A Look At SQI Diagnostics' Liabilities

We can see from the most recent balance sheet that SQI Diagnostics had liabilities of CA$2.11m falling due within a year, and liabilities of CA$4.54m due beyond that. Offsetting these obligations, it had cash of CA$3.38m as well as receivables valued at CA$185.0k due within 12 months. So it has liabilities totalling CA$3.09m more than its cash and near-term receivables, combined.

Since publicly traded SQI Diagnostics shares are worth a total of CA$74.8m, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, SQI Diagnostics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is SQI Diagnostics's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year SQI Diagnostics had a loss before interest and tax, and actually shrunk its revenue by 17%, to CA$815k. We would much prefer see growth.

So How Risky Is SQI Diagnostics?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that SQI Diagnostics had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CA$13m and booked a CA$10m accounting loss. Given it only has net cash of CA$1.16m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. For instance, we've identified 5 warning signs for SQI Diagnostics (3 are a bit unpleasant) you should be aware of.

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.