Is Loqus Holdings (MTSE:LQS) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Loqus Holdings p.l.c. (MTSE:LQS) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Our free stock report includes 3 warning signs investors should be aware of before investing in Loqus Holdings. Read for free now.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Loqus Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 Loqus Holdings had €2.28m of debt, an increase on €1.86m, over one year. On the flip side, it has €1.62m in cash leading to net debt of about €658.7k.

How Healthy Is Loqus Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Loqus Holdings had liabilities of €7.77m due within 12 months and liabilities of €722.0k due beyond that. Offsetting this, it had €1.62m in cash and €2.62m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €4.25m.

This deficit is considerable relative to its market capitalization of €4.75m, so it does suggest shareholders should keep an eye on Loqus Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Loqus Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

View our latest analysis for Loqus Holdings

Over 12 months, Loqus Holdings reported revenue of €12m, which is a gain of 10%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Loqus Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost €234k at the EBIT level. 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. We would feel better if it turned its trailing twelve month loss of €367k into a profit. In the meantime, we consider the stock very risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Loqus Holdings , and understanding them should be part of your investment process.

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.

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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.