Is Qt Group Oyj (HEL:QTCOM) A Risky Investment?

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. Importantly, Qt Group Oyj (HEL:QTCOM) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Qt Group Oyj

What Is Qt Group Oyj's Debt?

As you can see below, at the end of June 2022, Qt Group Oyj had €17.3m of debt, up from none a year ago. Click the image for more detail. But it also has €18.6m in cash to offset that, meaning it has €1.32m net cash.

A Look At Qt Group Oyj's Liabilities

We can see from the most recent balance sheet that Qt Group Oyj had liabilities of €51.1m falling due within a year, and liabilities of €13.8m due beyond that. Offsetting these obligations, it had cash of €18.6m as well as receivables valued at €44.4m due within 12 months. So its liabilities total €1.82m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Qt Group Oyj's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the €1.53b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Qt Group Oyj boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Qt Group Oyj has increased its EBIT by 2.3% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. 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. Qt Group Oyj may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Qt Group Oyj's free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Qt Group Oyj's liabilities, but we can be reassured by the fact it has has net cash of €1.32m. On top of that, it increased its EBIT by 2.3% in the last twelve months. So we are not troubled with Qt Group Oyj's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Qt Group Oyj (2 can't be ignored) you should be aware of.

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.