Does QES Group Berhad (KLSE:QES) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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. As with many other companies QES Group Berhad (KLSE:QES) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out the opportunities and risks within the MY Electronic industry.

How Much Debt Does QES Group Berhad Carry?

You can click the graphic below for the historical numbers, but it shows that QES Group Berhad had RM36.1m of debt in June 2022, down from RM41.9m, one year before. But on the other hand it also has RM76.4m in cash, leading to a RM40.2m net cash position.

How Strong Is QES Group Berhad's Balance Sheet?

According to the last reported balance sheet, QES Group Berhad had liabilities of RM73.8m due within 12 months, and liabilities of RM19.4m due beyond 12 months. Offsetting this, it had RM76.4m in cash and RM55.2m in receivables that were due within 12 months. So it actually has RM38.4m more liquid assets than total liabilities.

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

On top of that, QES Group Berhad grew its EBIT by 39% 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 QES Group Berhad can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. QES Group Berhad may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, QES Group Berhad recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While it is always sensible to investigate a company's debt, in this case QES Group Berhad has RM40.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 39% over the last year. So is QES Group Berhad's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for QES Group Berhad you should know about.

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.