These 4 Measures Indicate That Q Technology (Group) (HKG:1478) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Q Technology (Group) Company Limited (HKG:1478) does use debt in its business. But is this debt a concern to shareholders?

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Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Q Technology (Group) Carry?

The image below, which you can click on for greater detail, shows that Q Technology (Group) had debt of CN¥2.43b at the end of December 2024, a reduction from CN¥4.37b over a year. However, its balance sheet shows it holds CN¥2.92b in cash, so it actually has CN¥486.2m net cash.

A Look At Q Technology (Group)'s Liabilities

The latest balance sheet data shows that Q Technology (Group) had liabilities of CN¥9.09b due within a year, and liabilities of CN¥271.3m falling due after that. Offsetting these obligations, it had cash of CN¥2.92b as well as receivables valued at CN¥4.71b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.73b.

This deficit isn't so bad because Q Technology (Group) is worth CN¥7.45b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Q Technology (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Q Technology (Group)

Even more impressive was the fact that Q Technology (Group) grew its EBIT by 377% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Q Technology (Group) can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Q Technology (Group) 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. Happily for any shareholders, Q Technology (Group) actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While Q Technology (Group) does have more liabilities than liquid assets, it also has net cash of CN¥486.2m. And it impressed us with free cash flow of CN¥965m, being 292% of its EBIT. So is Q Technology (Group)'s debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Q Technology (Group), you may well want to click here to check an interactive graph of its earnings per share history.

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.