Is Qwamplify (EPA:ALQWA) 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. We note that Qwamplify (EPA:ALQWA) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Qwamplify

How Much Debt Does Qwamplify Carry?

As you can see below, Qwamplify had €8.79m of debt at March 2021, down from €10.1m a year prior. However, its balance sheet shows it holds €17.7m in cash, so it actually has €8.95m net cash.

How Healthy Is Qwamplify's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Qwamplify had liabilities of €24.8m due within 12 months and liabilities of €2.88m due beyond that. Offsetting these obligations, it had cash of €17.7m as well as receivables valued at €9.85m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Having regard to Qwamplify's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the €53.7m company is short on cash, but still worth keeping an eye on the balance sheet. While it does have liabilities worth noting, Qwamplify also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Qwamplify grew its EBIT by 3,020% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Qwamplify's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Qwamplify 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, Qwamplify generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Qwamplify has €8.95m in net cash. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in €5.6m. So we don't think Qwamplify's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Qwamplify (of which 1 doesn't sit too well with us!) you should know about.

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.
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