Quess (NSE:QUESS) Has A Rock Solid Balance Sheet

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.' 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 Quess Corp Limited (NSE:QUESS) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 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 Net Debt?

As you can see below, Quess had ₹2.53b of debt at September 2024, down from ₹4.73b a year prior. However, its balance sheet shows it holds ₹5.87b in cash, so it actually has ₹3.34b net cash.

How Healthy Is Quess' Balance Sheet?

According to the last reported balance sheet, Quess had liabilities of ₹26.5b due within 12 months, and liabilities of ₹6.75b due beyond 12 months. Offsetting this, it had ₹5.87b in cash and ₹30.5b in receivables that were due within 12 months. So it actually has ₹3.06b more liquid assets than total liabilities.

This surplus suggests that Quess has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Quess boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Quess grew its EBIT by 52% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Happily for any shareholders, Quess 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 we empathize with investors who find debt concerning, you should keep in mind that Quess has net cash of ₹3.34b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of ₹5.4b, being 108% of its EBIT. So is Quess's debt a risk? It doesn't seem so to us. We'd be very excited to see if Quess insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.