Is QES Group Berhad (KLSE:QES) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, QES Group Berhad (KLSE:QES) does carry debt. But is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for QES Group Berhad

What Is QES Group Berhad's Net Debt?

As you can see below, QES Group Berhad had RM26.9m of debt at December 2021, down from RM28.8m a year prior. But on the other hand it also has RM82.0m in cash, leading to a RM55.0m net cash position.

A Look At QES Group Berhad's Liabilities

The latest balance sheet data shows that QES Group Berhad had liabilities of RM73.9m due within a year, and liabilities of RM19.1m falling due after that. Offsetting these obligations, it had cash of RM82.0m as well as receivables valued at RM63.5m due within 12 months. So it actually has RM52.5m 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.

Better yet, QES Group Berhad grew its EBIT by 129% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is QES Group Berhad'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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, QES Group Berhad recorded negative free cash flow, in total. Debt is far more risky for companies with unreliable free cash flow, so shareholders should be hoping that the past expenditure will produce free cash flow in the future.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that QES Group Berhad has net cash of RM55.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 129% over the last year. So we don't think QES Group Berhad's use of debt is 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. For example QES Group Berhad has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.