These 4 Measures Indicate That QES Group Berhad (KLSE:QES) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 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?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

What Is QES Group Berhad's Debt?

As you can see below, at the end of March 2025, QES Group Berhad had RM52.5m of debt, up from RM37.3m a year ago. Click the image for more detail. But it also has RM103.6m in cash to offset that, meaning it has RM51.1m net cash.

How Strong Is QES Group Berhad's Balance Sheet?

According to the last reported balance sheet, QES Group Berhad had liabilities of RM72.7m due within 12 months, and liabilities of RM45.8m due beyond 12 months. Offsetting these obligations, it had cash of RM103.6m as well as receivables valued at RM63.2m due within 12 months. So it can boast RM48.4m 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!

View our latest analysis for QES Group Berhad

The good news is that QES Group Berhad has increased its EBIT by 9.5% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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. Looking at the most recent three years, QES Group Berhad recorded free cash flow of 40% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While it is always sensible to investigate a company's debt, in this case QES Group Berhad has RM51.1m in net cash and a decent-looking balance sheet. And it also grew its EBIT by 9.5% over the last year. So we don't think QES Group Berhad's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for QES Group Berhad that you should be aware of before investing here.

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. 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.