Quantafuel (OB:QFUEL) Has Debt But No Earnings; Should You Worry?

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 Quantafuel ASA (OB:QFUEL) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Quantafuel

What Is Quantafuel's Net Debt?

The image below, which you can click on for greater detail, shows that Quantafuel had debt of kr99.4m at the end of March 2022, a reduction from kr365.4m over a year. However, its balance sheet shows it holds kr577.5m in cash, so it actually has kr478.0m net cash.

How Strong Is Quantafuel's Balance Sheet?

We can see from the most recent balance sheet that Quantafuel had liabilities of kr85.1m falling due within a year, and liabilities of kr305.0m due beyond that. On the other hand, it had cash of kr577.5m and kr14.4m worth of receivables due within a year. So it can boast kr201.8m more liquid assets than total liabilities.

This surplus suggests that Quantafuel has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Quantafuel has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Over 12 months, Quantafuel reported revenue of kr14m, which is a gain of 34%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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 in the last year Quantafuel had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through kr385m of cash and made a loss of kr191m. With only kr478.0m on the balance sheet, it would appear that its going to need to raise capital again soon. With very solid revenue growth in the last year, Quantafuel may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. 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. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Quantafuel (of which 1 is significant!) 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. 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.