David Iben put it well when he said, ‘Volatility is not a risk we care about. What we care about is avoiding the 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 can see that QAD Inc. (NASDAQ:QADA) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company’s debt levels is to consider its cash and debt together.
What Is QAD’s Net Debt?
The chart below, which you can click on for greater detail, shows that QAD had US$13.2m in debt in July 2019; about the same as the year before. But on the other hand it also has US$143.0m in cash, leading to a US$129.8m net cash position.
How Healthy Is QAD’s Balance Sheet?
The latest balance sheet data shows that QAD had liabilities of US$140.1m due within a year, and liabilities of US$32.5m falling due after that. On the other hand, it had cash of US$143.0m and US$43.9m worth of receivables due within a year. So it actually has US$14.3m more liquid assets than total liabilities.
Having regard to QAD’s size, it seems that its liquid assets are well balanced with its total liabilities. So while it’s hard to imagine that the US$892.9m company is struggling for cash, we still think it’s worth monitoring its balance sheet. Succinctly put, QAD boasts net cash, so it’s fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if QAD 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.
Over 12 months, QAD made a loss at the EBIT level, and saw its revenue drop to US$317m, which is a fall of 3.6%. We would much prefer see growth.
So How Risky Is QAD?
While QAD lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$17m. So taking that on face value, and considering the net cash situation, we don’t think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we’re don’t find the investment opportunity particularly compelling. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we’re providing readers this interactive graph showing how QAD’s profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you’re the type of investor who prefers buying stocks without the burden of debt, then don’t hesitate to discover our exclusive list of net cash growth stocks, today.
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