Is Quantafuel (OB:QFUEL) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Quantafuel ASA (OB:QFUEL) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Quantafuel

How Much Debt Does Quantafuel Carry?

As you can see below, at the end of September 2020, Quantafuel had kr514.3m of debt, up from kr16.8m a year ago. Click the image for more detail. But it also has kr770.5m in cash to offset that, meaning it has kr256.2m net cash.

How Strong Is Quantafuel's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Quantafuel had liabilities of kr94.3m due within 12 months and liabilities of kr655.6m due beyond that. Offsetting this, it had kr770.5m in cash and kr12.5m in receivables that were due within 12 months. So it can boast kr33.0m more liquid assets than total liabilities.

Having regard to Quantafuel's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the kr6.24b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Quantafuel boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Quantafuel's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Quantafuel managed to produce its first revenue as a listed company, but given the lack of profit, shareholders will no doubt be hoping to see some strong increases.

So How Risky Is Quantafuel?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Quantafuel had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of kr331m and booked a kr539m accounting loss. With only kr256.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 4 warning signs with Quantafuel (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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. 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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