Here's Why QES Group Berhad (KLSE:QES) Can Manage Its Debt Responsibly

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 note that QES Group Berhad (KLSE:QES) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. 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 QES Group Berhad

What Is QES Group Berhad's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 QES Group Berhad had RM34.4m of debt, an increase on RM23.0m, over one year. But on the other hand it also has RM80.8m in cash, leading to a RM46.4m 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 RM75.5m due within 12 months, and liabilities of RM22.0m due beyond 12 months. On the other hand, it had cash of RM80.8m and RM71.7m worth of receivables due within a year. So it actually has RM55.0m more liquid assets than total liabilities.

This short term liquidity is a sign that QES Group Berhad could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, QES Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for QES Group Berhad if management cannot prevent a repeat of the 23% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While QES Group Berhad 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. Considering the last three years, QES Group Berhad actually recorded a cash outflow, overall. 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 RM46.4m in net cash and a decent-looking balance sheet. So we are not troubled with QES Group Berhad's debt use. Over time, share prices tend to follow earnings per share, so if you're interested in QES Group Berhad, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.