Qwamplify (EPA:ALQWA) Seems To Use Debt Quite Sensibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Qwamplify (EPA:ALQWA) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Qwamplify

How Much Debt Does Qwamplify Carry?

As you can see below, at the end of September 2020, Qwamplify had €12.1m of debt, up from €10.1m a year ago. Click the image for more detail. But it also has €19.3m in cash to offset that, meaning it has €7.21m net cash.

How Strong Is Qwamplify's Balance Sheet?

We can see from the most recent balance sheet that Qwamplify had liabilities of €30.3m falling due within a year, and liabilities of €3.96m due beyond that. Offsetting these obligations, it had cash of €19.3m as well as receivables valued at €12.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €2.29m.

Given Qwamplify has a market capitalization of €38.4m, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

In fact Qwamplify's saving grace is its low debt levels, because its EBIT has tanked 23% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Qwamplify 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. 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 produced sturdy free cash flow equating to 70% 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 look at a company's total liabilities, it is very reassuring that Qwamplify has €7.21m in net cash. The cherry on top was that in converted 70% of that EBIT to free cash flow, bringing in €1.3m. So we don't have any problem with Qwamplify's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Qwamplify has 3 warning signs (and 1 which is a bit unpleasant) we think you should know about.

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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