Is Quartiers Properties (STO:QUART) A Risky Investment?

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.' 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 can see that Quartiers Properties AB (publ) (STO:QUART) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Quartiers Properties

What Is Quartiers Properties's Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Quartiers Properties had debt of kr305.5m, up from kr271.2m in one year. However, because it has a cash reserve of kr45.4m, its net debt is less, at about kr260.1m.

How Healthy Is Quartiers Properties' Balance Sheet?

The latest balance sheet data shows that Quartiers Properties had liabilities of kr35.7m due within a year, and liabilities of kr334.4m falling due after that. Offsetting these obligations, it had cash of kr45.4m as well as receivables valued at kr18.9m due within 12 months. So it has liabilities totalling kr305.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of kr252.0m, we think shareholders really should watch Quartiers Properties's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Quartiers Properties will need earnings to service that debt. 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.

Given it has no significant operating revenue at the moment, shareholders will be hoping Quartiers Properties can make progress and gain better traction for the business, before it runs low on cash.

Caveat Emptor

Over the last twelve months Quartiers Properties produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at kr24m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through kr14m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Quartiers Properties (including 1 which is a bit concerning) .

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. 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.