Does Quality & ReliabilityE.E (ATH:QUAL) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Quality & Reliability A.B.E.E (ATH:QUAL) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Quality & ReliabilityE.E

What Is Quality & ReliabilityE.E's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Quality & ReliabilityE.E had debt of €3.18m, up from €2.32m in one year. However, because it has a cash reserve of €1.05m, its net debt is less, at about €2.14m.

How Strong Is Quality & ReliabilityE.E's Balance Sheet?

According to the last reported balance sheet, Quality & ReliabilityE.E had liabilities of €2.43m due within 12 months, and liabilities of €2.19m due beyond 12 months. Offsetting these obligations, it had cash of €1.05m as well as receivables valued at €3.32m due within 12 months. So it has liabilities totalling €253.2k more than its cash and near-term receivables, combined.

Of course, Quality & ReliabilityE.E has a market capitalization of €7.11m, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Quality & ReliabilityE.E will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Quality & ReliabilityE.E wasn't profitable at an EBIT level, but managed to grow its revenue by 28%, to €2.9m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Even though Quality & ReliabilityE.E managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. To be specific the EBIT loss came in at €174k. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through €360k of cash over the last year. So suffice it to say we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Quality & ReliabilityE.E (at least 2 which don't sit too well with us) , and understanding them should be part of your investment process.

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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