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

By
Simply Wall St
Published
March 23, 2022
OM:QUART
Source: Shutterstock

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Quartiers Properties AB (publ) (STO:QUART) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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 Quartiers Properties

What Is Quartiers Properties's Debt?

You can click the graphic below for the historical numbers, but it shows that Quartiers Properties had kr286.2m of debt in December 2021, down from kr310.4m, one year before. However, it does have kr48.7m in cash offsetting this, leading to net debt of about kr237.5m.

debt-equity-history-analysis
OM:QUART Debt to Equity History March 23rd 2022

How Strong Is Quartiers Properties' Balance Sheet?

We can see from the most recent balance sheet that Quartiers Properties had liabilities of kr20.1m falling due within a year, and liabilities of kr329.3m due beyond that. Offsetting these obligations, it had cash of kr48.7m as well as receivables valued at kr18.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by kr281.8m.

Given this deficit is actually higher than the company's market capitalization of kr228.5m, we think shareholders really should watch Quartiers Properties's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

It seems likely shareholders hope that Quartiers Properties can significantly advance the business plan before too long, because it doesn't have any significant revenue at the moment.

Caveat Emptor

Importantly, Quartiers Properties had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable kr33m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of kr54m. In the meantime, we consider the stock to be 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 3 warning signs for Quartiers Properties (1 is potentially serious!) 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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