Is Quorum Information Technologies (CVE:QIS) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Quorum Information Technologies Inc. (CVE:QIS) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Quorum Information Technologies

What Is Quorum Information Technologies's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Quorum Information Technologies had CA$9.50m of debt, an increase on CA$8.96m, over one year. However, it does have CA$10.2m in cash offsetting this, leading to net cash of CA$714.3k.

A Look At Quorum Information Technologies' Liabilities

We can see from the most recent balance sheet that Quorum Information Technologies had liabilities of CA$4.54m falling due within a year, and liabilities of CA$15.4m due beyond that. Offsetting these obligations, it had cash of CA$10.2m as well as receivables valued at CA$3.17m due within 12 months. So its liabilities total CA$6.51m more than the combination of its cash and short-term receivables.

Since publicly traded Quorum Information Technologies shares are worth a total of CA$101.9m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Quorum Information Technologies boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Quorum Information Technologies can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Quorum Information Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CA$31m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Quorum Information Technologies?

While Quorum Information Technologies lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CA$1.2m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Quorum Information Technologies (of which 1 makes us a bit uncomfortable!) 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. 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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