Health Check: How Prudently Does QPL International Holdings (HKG:243) Use 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. As with many other companies QPL International Holdings Limited (HKG:243) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. 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, 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 QPL International Holdings

How Much Debt Does QPL International Holdings Carry?

The image below, which you can click on for greater detail, shows that at October 2021 QPL International Holdings had debt of HK$91.6m, up from HK$30.8m in one year. But on the other hand it also has HK$229.8m in cash, leading to a HK$138.2m net cash position.

How Healthy Is QPL International Holdings' Balance Sheet?

The latest balance sheet data shows that QPL International Holdings had liabilities of HK$203.0m due within a year, and liabilities of HK$18.1m falling due after that. On the other hand, it had cash of HK$229.8m and HK$180.0m worth of receivables due within a year. So it actually has HK$188.7m more liquid assets than total liabilities.

This surplus strongly suggests that QPL International Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, QPL International Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is QPL International 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, QPL International Holdings reported revenue of HK$440m, which is a gain of 45%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is QPL International Holdings?

While QPL International Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$20m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We also take heart from the solid 45% revenue growth in 12 months; undoubtedly a good sign. So this may well be an interesting business to watch grow. 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. We've identified 4 warning signs with QPL International Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.