These 4 Measures Indicate That Qt Group Oyj (HEL:QTCOM) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Qt Group Oyj (HEL:QTCOM) makes use of debt. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Qt Group Oyj

What Is Qt Group Oyj's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2023 Qt Group Oyj had debt of €28.3m, up from €18.2m in one year. However, because it has a cash reserve of €23.1m, its net debt is less, at about €5.20m.

How Strong Is Qt Group Oyj's Balance Sheet?

We can see from the most recent balance sheet that Qt Group Oyj had liabilities of €38.3m falling due within a year, and liabilities of €51.6m due beyond that. On the other hand, it had cash of €23.1m and €48.8m worth of receivables due within a year. So it has liabilities totalling €18.1m more than its cash and near-term receivables, combined.

Having regard to Qt Group Oyj's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €2.08b company is short on cash, but still worth keeping an eye on the balance sheet. Carrying virtually no net debt, Qt Group Oyj has a very light debt load indeed.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Qt Group Oyj's net debt is only 0.11 times its EBITDA. And its EBIT covers its interest expense a whopping 33.0 times over. So we're pretty relaxed about its super-conservative use of debt. In addition to that, we're happy to report that Qt Group Oyj has boosted its EBIT by 32%, thus reducing the spectre of future debt repayments. 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 company can only pay off debt with cold hard cash, not accounting profits. So we always check how much of that EBIT is translated into free cash flow. Looking at the most recent three years, Qt Group Oyj recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Our View

Happily, Qt Group Oyj's impressive interest cover implies it has the upper hand on its debt. But, on a more sombre note, we are a little concerned by its conversion of EBIT to free cash flow. Looking at the bigger picture, we think Qt Group Oyj's use of debt seems quite reasonable and we're not concerned about it. While debt does bring risk, when used wisely it can also bring a higher return on equity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 4 warning signs for Qt Group Oyj (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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.