QES Group Berhad (KLSE:QES) Could Easily Take On More 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.' 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 can see that QES Group Berhad (KLSE:QES) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, 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 2020 QES Group Berhad had RM28.8m of debt, an increase on RM11.5m, over one year. However, its balance sheet shows it holds RM89.2m in cash, so it actually has RM60.5m net cash.

How Healthy Is QES Group Berhad's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that QES Group Berhad had liabilities of RM50.5m due within 12 months and liabilities of RM21.4m due beyond that. Offsetting this, it had RM89.2m in cash and RM40.5m in receivables that were due within 12 months. So it actually has RM57.9m 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. Succinctly put, QES Group Berhad boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, QES Group Berhad grew its EBIT by 143% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is QES Group Berhad's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

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. Looking at the most recent three years, QES Group Berhad recorded free cash flow of 24% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down 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 RM60.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 143% 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. For example QES Group Berhad has 3 warning signs (and 1 which makes us a bit uncomfortable) we think 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.

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This article by Simply Wall St is general in nature. 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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