These 4 Measures Indicate That Qeeka Home (Cayman) (HKG:1739) Is Using Debt Safely

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.' 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. We note that Qeeka Home (Cayman) Inc. (HKG:1739) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at 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 2021, Qeeka Home (Cayman) had CN¥47.5m of debt, up from CN¥12.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥1.18b in cash, leading to a CN¥1.14b net cash position.

How Healthy Is Qeeka Home (Cayman)'s Balance Sheet?

We can see from the most recent balance sheet that Qeeka Home (Cayman) had liabilities of CN¥967.5m falling due within a year, and liabilities of CN¥20.4m due beyond that. On the other hand, it had cash of CN¥1.18b and CN¥300.2m worth of receivables due within a year. So it actually has CN¥496.8m more liquid assets than total liabilities.

This surplus liquidity suggests that Qeeka Home (Cayman)'s balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Qeeka Home (Cayman) boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, Qeeka Home (Cayman) turned things around in the last 12 months, delivering and EBIT of CN¥9.8m. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Qeeka Home (Cayman) 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 company can only pay off debt with cold hard cash, not accounting profits. While Qeeka Home (Cayman) has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Qeeka Home (Cayman) actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Qeeka Home (Cayman) has CN¥1.14b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 468% of that EBIT to free cash flow, bringing in CN¥46m. So we don't think Qeeka Home (Cayman)'s use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. 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 Qeeka Home (Cayman) .

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.

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.

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