We Think Q P Group Holdings (HKG:1412) Can Stay On Top Of Its Debt

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.' 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. We note that Q P Group Holdings Limited (HKG:1412) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Q P Group Holdings

How Much Debt Does Q P Group Holdings Carry?

The chart below, which you can click on for greater detail, shows that Q P Group Holdings had HK$96.2m in debt in June 2024; about the same as the year before. However, its balance sheet shows it holds HK$233.5m in cash, so it actually has HK$137.3m net cash.

How Strong Is Q P Group Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Q P Group Holdings had liabilities of HK$318.4m due within 12 months and liabilities of HK$16.5m due beyond that. On the other hand, it had cash of HK$233.5m and HK$223.5m worth of receivables due within a year. So it actually has HK$122.1m more liquid assets than total liabilities.

This surplus suggests that Q P Group Holdings is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Q P Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

The good news is that Q P Group Holdings has increased its EBIT by 9.2% over twelve months, which should ease any concerns about debt repayment. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Q P Group Holdings will need earnings to service that debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Q P Group Holdings 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. In the last three years, Q P Group Holdings's free cash flow amounted to 44% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Q P Group Holdings has net cash of HK$137.3m, as well as more liquid assets than liabilities. And it also grew its EBIT by 9.2% over the last year. So is Q P Group Holdings's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Q P Group Holdings that you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.