Quartiers Properties (STO:QUART) Has Debt But No Earnings; Should You Worry?

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.' 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 note that Quartiers Properties AB (publ) (STO:QUART) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Quartiers Properties

How Much Debt Does Quartiers Properties Carry?

As you can see below, at the end of June 2020, Quartiers Properties had kr271.2m of debt, up from kr233.4m a year ago. Click the image for more detail. And it doesn't have much cash, so its net debt is about the same.

A Look At Quartiers Properties's Liabilities

We can see from the most recent balance sheet that Quartiers Properties had liabilities of kr55.9m falling due within a year, and liabilities of kr288.6m due beyond that. On the other hand, it had cash of kr2.16m and kr6.17m worth of receivables due within a year. So its liabilities total kr336.1m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's kr259.3m market capitalization, you might well be inclined to review the balance sheet intently. 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. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Quartiers Properties made a loss at the EBIT level, and saw its revenue drop to kr64m, which is a fall of 21%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Quartiers Properties's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping kr59m. 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. Not least because it burned through kr36m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with Quartiers Properties (including 2 which is shouldn't be ignored) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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