Qt Group Oyj (HEL:QTCOM) Has A Pretty Healthy Balance Sheet

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.' 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. As with many other companies Qt Group Oyj (HEL:QTCOM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that QTCOM is potentially undervalued!

What Is Qt Group Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2022 Qt Group Oyj had debt of €17.9m, up from none in one year. But on the other hand it also has €18.9m in cash, leading to a €1.00m net cash position.

How Healthy Is Qt Group Oyj's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qt Group Oyj had liabilities of €50.1m due within 12 months and liabilities of €57.1m due beyond that. Offsetting these obligations, it had cash of €18.9m as well as receivables valued at €51.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €37.0m.

Since publicly traded Qt Group Oyj shares are worth a total of €1.20b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Qt Group Oyj also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that Qt Group Oyj has increased its EBIT by 5.8% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Qt Group 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, Qt Group Oyj recorded free cash flow of 36% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

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 €1.00m. On top of that, it increased its EBIT by 5.8% in the last twelve months. So we are not troubled with Qt Group Oyj's debt use. 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. Case in point: We've spotted 1 warning sign for Qt Group Oyj you should be aware of.

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.