Here's Why Quess (NSE:QUESS) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, Quess Corp Limited (NSE:QUESS) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Quess

What Is Quess's Debt?

As you can see below, Quess had ₹5.31b of debt at March 2023, down from ₹5.88b a year prior. However, its balance sheet shows it holds ₹6.13b in cash, so it actually has ₹818.1m net cash.

How Strong Is Quess' Balance Sheet?

We can see from the most recent balance sheet that Quess had liabilities of ₹27.7b falling due within a year, and liabilities of ₹6.22b due beyond that. Offsetting these obligations, it had cash of ₹6.13b as well as receivables valued at ₹26.9b due within 12 months. So it has liabilities totalling ₹828.1m more than its cash and near-term receivables, combined.

This state of affairs indicates that Quess' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the ₹61.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Quess also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Quess's EBIT fell a jaw-dropping 24% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Quess can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Quess 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 three years, Quess actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Quess's liabilities, but we can be reassured by the fact it has has net cash of ₹818.1m. The cherry on top was that in converted 155% of that EBIT to free cash flow, bringing in ₹3.6b. So we don't have any problem with Quess's use of debt. 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. For example, we've discovered 2 warning signs for Quess that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.