Is Q.S.I (KOSDAQ:066310) Using Too Much 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. Importantly, Q.S.I Co., LTD. (KOSDAQ:066310) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Q.S.I

What Is Q.S.I's Debt?

As you can see below, at the end of September 2020, Q.S.I had ₩7.43b of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩19.4b in cash, so it actually has ₩12.0b net cash.

A Look At Q.S.I's Liabilities

Zooming in on the latest balance sheet data, we can see that Q.S.I had liabilities of ₩11.7b due within 12 months and liabilities of ₩7.81b due beyond that. Offsetting this, it had ₩19.4b in cash and ₩8.58b in receivables that were due within 12 months. So it can boast ₩8.44b more liquid assets than total liabilities.

This surplus suggests that Q.S.I has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Q.S.I has more cash than debt is arguably a good indication that it can manage its debt safely.

Although Q.S.I made a loss at the EBIT level, last year, it was also good to see that it generated ₩413m in EBIT over the last twelve months. 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 Q.S.I will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Q.S.I 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. During the last year, Q.S.I burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While it is always sensible to investigate a company's debt, in this case Q.S.I has ₩12.0b in net cash and a decent-looking balance sheet. So we are not troubled with Q.S.I's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Q.S.I (including 1 which shouldn't be ignored) .

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. 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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