Here's Why QUIZ (LON:QUIZ) Can Manage Its Debt Responsibly

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.' 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. Importantly, QUIZ plc (LON:QUIZ) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for QUIZ

What Is QUIZ's Net Debt?

As you can see below, QUIZ had UK£1.41m of debt, at March 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has UK£7.58m in cash, leading to a UK£6.17m net cash position.

How Healthy Is QUIZ's Balance Sheet?

We can see from the most recent balance sheet that QUIZ had liabilities of UK£16.3m falling due within a year, and liabilities of UK£4.99m due beyond that. On the other hand, it had cash of UK£7.58m and UK£5.07m worth of receivables due within a year. So its liabilities total UK£8.62m more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of UK£7.52m, we think shareholders really should watch QUIZ's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Given that QUIZ has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

It was also good to see that despite losing money on the EBIT line last year, QUIZ turned things around in the last 12 months, delivering and EBIT of UK£2.5m. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if QUIZ can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. QUIZ 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. Happily for any shareholders, QUIZ actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although QUIZ's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of UK£6.17m. The cherry on top was that in converted 141% of that EBIT to free cash flow, bringing in UK£3.5m. So we are not troubled with QUIZ's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs we've spotted with QUIZ .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.