Stock Analysis

Health Check: How Prudently Does Quali-Smart Holdings (HKG:1348) Use Debt?

Source: Shutterstock

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Quali-Smart Holdings Limited (HKG:1348) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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 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 Quali-Smart Holdings

How Much Debt Does Quali-Smart Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Quali-Smart Holdings had HK$47.1m of debt in September 2022, down from HK$134.4m, one year before. But on the other hand it also has HK$62.8m in cash, leading to a HK$15.8m net cash position.

SEHK:1348 Debt to Equity History March 16th 2023

A Look At Quali-Smart Holdings' Liabilities

The latest balance sheet data shows that Quali-Smart Holdings had liabilities of HK$128.3m due within a year, and liabilities of HK$18.9m falling due after that. Offsetting this, it had HK$62.8m in cash and HK$38.0m in receivables that were due within 12 months. So it has liabilities totalling HK$46.4m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Quali-Smart Holdings has a market capitalization of HK$117.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Quali-Smart Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Quali-Smart Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Quali-Smart Holdings saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

So How Risky Is Quali-Smart Holdings?

Although Quali-Smart Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of HK$98m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. To that end, you should learn about the 3 warning signs we've spotted with Quali-Smart Holdings (including 2 which don't sit too well with us) .

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.

Valuation is complex, but we're helping make it simple.

Find out whether Quali-Smart Holdings is potentially over or undervalued by checking out our comprehensive analysis, which includes fair value estimates, risks and warnings, dividends, insider transactions and financial health.

View the Free Analysis