Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Y.Z. Queenco Ltd. (TLV:QNCO) makes use of debt. But the more important question is: how much risk is that debt creating?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Y.Z. Queenco
How Much Debt Does Y.Z. Queenco Carry?
You can click the graphic below for the historical numbers, but it shows that Y.Z. Queenco had ₪22.3m of debt in December 2020, down from ₪26.8m, one year before. On the flip side, it has ₪12.0m in cash leading to net debt of about ₪10.3m.
A Look At Y.Z. Queenco's Liabilities
We can see from the most recent balance sheet that Y.Z. Queenco had liabilities of ₪48.7m falling due within a year, and liabilities of ₪51.0m due beyond that. Offsetting these obligations, it had cash of ₪12.0m as well as receivables valued at ₪5.95m due within 12 months. So it has liabilities totalling ₪81.7m more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Y.Z. Queenco has a market capitalization of ₪242.6m, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Y.Z. Queenco'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, Y.Z. Queenco made a loss at the EBIT level, and saw its revenue drop to ₪49m, which is a fall of 61%. To be frank that doesn't bode well.
Caveat Emptor
While Y.Z. Queenco's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₪9.3m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled ₪8.0m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Y.Z. Queenco that you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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This article by Simply Wall St is general in nature. 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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About TASE:QNCO
Flawless balance sheet with solid track record.
