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

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Quantafuel ASA (OB:QFUEL) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Quantafuel

What Is Quantafuel's Net Debt?

As you can see below, at the end of March 2021, Quantafuel had kr365.4m of debt, up from kr119.4m a year ago. Click the image for more detail. But on the other hand it also has kr577.6m in cash, leading to a kr212.2m net cash position.

How Healthy Is Quantafuel's Balance Sheet?

We can see from the most recent balance sheet that Quantafuel had liabilities of kr87.7m falling due within a year, and liabilities of kr544.6m due beyond that. Offsetting these obligations, it had cash of kr577.6m as well as receivables valued at kr5.95m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr48.8m.

This state of affairs indicates that Quantafuel's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the kr4.79b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Quantafuel also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Quantafuel can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Quantafuel wasn't profitable at an EBIT level, but managed to grow its revenue by 40,532%, to kr10m. That's virtually the hole-in-one of revenue growth!

So How Risky Is Quantafuel?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Quantafuel lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through kr330m of cash and made a loss of kr360m. Given it only has net cash of kr212.2m, the company may need to raise more capital if it doesn't reach break-even soon. The good news for shareholders is that Quantafuel has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Quantafuel has 4 warning signs (and 1 which makes us a bit uncomfortable) we think you should know about.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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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