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

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.' 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. We can see that QES Group Berhad (KLSE:QES) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Debt?

As you can see below, at the end of March 2024, QES Group Berhad had RM37.3m of debt, up from RM29.7m a year ago. Click the image for more detail. But on the other hand it also has RM72.1m in cash, leading to a RM34.8m net cash position.

How Strong Is QES Group Berhad's Balance Sheet?

We can see from the most recent balance sheet that QES Group Berhad had liabilities of RM76.4m falling due within a year, and liabilities of RM25.1m due beyond that. On the other hand, it had cash of RM72.1m and RM74.8m worth of receivables due within a year. So it actually has RM45.4m 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 32% 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 it is future earnings, more than anything, that will determine QES Group Berhad's ability to maintain a healthy balance sheet going forward. 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. 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 reported free cash flow worth 9.3% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that QES Group Berhad has net cash of RM34.8m, as well as more liquid assets than liabilities. So we don't have any problem with QES Group Berhad's use of debt. 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.

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