Health Check: How Prudently Does Qeeka Home (Cayman) (HKG:1739) Use Debt?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, Qeeka Home (Cayman) Inc. (HKG:1739) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. 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 Qeeka Home (Cayman)

What Is Qeeka Home (Cayman)'s Net Debt?

As you can see below, at the end of June 2023, Qeeka Home (Cayman) had CN¥73.0m of debt, up from CN¥19.5m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥917.4m in cash, so it actually has CN¥844.3m net cash.

A Look At Qeeka Home (Cayman)'s Liabilities

We can see from the most recent balance sheet that Qeeka Home (Cayman) had liabilities of CN¥667.4m falling due within a year, and liabilities of CN¥23.0m due beyond that. Offsetting these obligations, it had cash of CN¥917.4m as well as receivables valued at CN¥315.4m due within 12 months. So it can boast CN¥542.4m more liquid assets than total liabilities.

This surplus strongly suggests that Qeeka Home (Cayman) has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that Qeeka Home (Cayman) has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Qeeka Home (Cayman)'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.

In the last year Qeeka Home (Cayman) had a loss before interest and tax, and actually shrunk its revenue by 7.2%, to CN¥941m. We would much prefer see growth.

So How Risky Is Qeeka Home (Cayman)?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Qeeka Home (Cayman) had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥131m and booked a CN¥85m accounting loss. Given it only has net cash of CN¥844.3m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. Be aware that Qeeka Home (Cayman) is showing 3 warning signs in our investment analysis , and 2 of those are concerning...

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.