Is QPR Software Oyj (HEL:QPR1V) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies QPR Software Oyj (HEL:QPR1V) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 QPR Software Oyj

What Is QPR Software Oyj's Net Debt?

The chart below, which you can click on for greater detail, shows that QPR Software Oyj had €1.50m in debt in September 2023; about the same as the year before. However, it also had €181.0k in cash, and so its net debt is €1.32m.

A Look At QPR Software Oyj's Liabilities

Zooming in on the latest balance sheet data, we can see that QPR Software Oyj had liabilities of €3.64m due within 12 months and liabilities of €1.21m due beyond that. Offsetting these obligations, it had cash of €181.0k as well as receivables valued at €1.90m due within 12 months. So it has liabilities totalling €2.77m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since QPR Software Oyj has a market capitalization of €7.87m, 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if QPR Software Oyj 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.

Over 12 months, QPR Software Oyj reported revenue of €8.1m, which is a gain of 4.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, QPR Software Oyj had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping €1.1m. 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. Another cause for caution is that is bled €406k in negative free cash flow over the last twelve months. So in short it's a really risky stock. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 5 warning signs we've spotted with QPR Software Oyj (including 3 which are potentially serious) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.