Quorum Information Technologies (CVE:QIS) Is Making Moderate Use Of 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.' 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. Importantly, Quorum Information Technologies Inc. (CVE:QIS) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Quorum Information Technologies

How Much Debt Does Quorum Information Technologies Carry?

The image below, which you can click on for greater detail, shows that Quorum Information Technologies had debt of CA$8.05m at the end of March 2022, a reduction from CA$9.92m over a year. However, it does have CA$5.78m in cash offsetting this, leading to net debt of about CA$2.27m.

How Strong Is Quorum Information Technologies' Balance Sheet?

We can see from the most recent balance sheet that Quorum Information Technologies had liabilities of CA$3.50m falling due within a year, and liabilities of CA$13.0m due beyond that. On the other hand, it had cash of CA$5.78m and CA$3.32m worth of receivables due within a year. So it has liabilities totalling CA$7.44m more than its cash and near-term receivables, combined.

Of course, Quorum Information Technologies has a market capitalization of CA$67.3m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Quorum Information Technologies's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Quorum Information Technologies wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CA$37m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Quorum Information Technologies produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CA$97k at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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$892k of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Quorum Information Technologies (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

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. 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.