Does Qt Group Oyj (HEL:QTCOM) Have A Healthy Balance Sheet?

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.' 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 Qt Group Oyj (HEL:QTCOM) makes use of debt. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Qt Group Oyj

What Is Qt Group Oyj's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Qt Group Oyj had €20.9m of debt, an increase on €17.9m, over one year. But on the other hand it also has €31.3m in cash, leading to a €10.4m net cash position.

How Healthy Is Qt Group Oyj's Balance Sheet?

We can see from the most recent balance sheet that Qt Group Oyj had liabilities of €56.5m falling due within a year, and liabilities of €27.6m due beyond that. Offsetting these obligations, it had cash of €31.3m as well as receivables valued at €53.5m due within 12 months. So these liquid assets roughly match the total liabilities.

Having regard to Qt Group Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the €1.69b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Qt Group Oyj has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Qt Group Oyj has boosted its EBIT by 42%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Qt Group Oyj'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Qt Group Oyj has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, Qt Group Oyj produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Qt Group Oyj has €10.4m in net cash and a decent-looking balance sheet. And we liked the look of last year's 42% year-on-year EBIT growth. So we don't think Qt Group Oyj's use of debt is risky. We'd be very excited to see if Qt Group Oyj insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.