Health Check: How Prudently Does Quantum Thinking (HKG:8050) Use Debt?

Warren Buffett famously said, '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. We can see that Quantum Thinking Limited (HKG:8050) does use debt in its business. But the real question is whether this debt is making the company risky.

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. 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. 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. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Quantum Thinking

What Is Quantum Thinking's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Quantum Thinking had debt of HK$25.6m, up from none in one year. However, its balance sheet shows it holds HK$37.8m in cash, so it actually has HK$12.2m net cash.

A Look At Quantum Thinking's Liabilities

The latest balance sheet data shows that Quantum Thinking had liabilities of HK$54.1m due within a year, and liabilities of HK$781.0k falling due after that. Offsetting these obligations, it had cash of HK$37.8m as well as receivables valued at HK$18.6m due within 12 months. So it can boast HK$1.52m more liquid assets than total liabilities.

This state of affairs indicates that Quantum Thinking's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the HK$515.4m company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Quantum Thinking has more cash than debt is arguably a good indication that it can manage its debt safely. 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 Quantum Thinking 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.

In the last year Quantum Thinking's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Quantum Thinking?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year Quantum Thinking had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$10m and booked a HK$19m accounting loss. With only HK$12.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Be aware that Quantum Thinking is showing 2 warning signs in our investment analysis , you should know about...

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.

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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.