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. As with many other companies HireQuest, Inc. (NASDAQ:HQI) makes use of debt. But the real question is whether this debt is making the company risky.
What Risk Does Debt Bring?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.
How Much Debt Does HireQuest Carry?
The image below, which you can click on for greater detail, shows that at September 2021 HireQuest had debt of US$3.21m, up from none in one year. But on the other hand it also has US$4.79m in cash, leading to a US$1.57m net cash position.
How Strong Is HireQuest's Balance Sheet?
According to the last reported balance sheet, HireQuest had liabilities of US$21.8m due within 12 months, and liabilities of US$7.83m due beyond 12 months. On the other hand, it had cash of US$4.79m and US$39.8m worth of receivables due within a year. So it actually has US$15.0m more liquid assets than total liabilities.
This surplus suggests that HireQuest has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that HireQuest has more cash than debt is arguably a good indication that it can manage its debt safely.
The good news is that HireQuest has increased its EBIT by 8.1% over twelve months, which should ease any concerns about debt repayment. 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 HireQuest can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While HireQuest has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, HireQuest actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
While it is always sensible to investigate a company's debt, in this case HireQuest has US$1.57m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of US$17m, being 130% of its EBIT. So is HireQuest's debt a risk? It doesn't seem so to us. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - HireQuest has 2 warning signs we think you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.