Does Q2 Holdings (NYSE:QTWO) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Q2 Holdings, Inc. (NYSE:QTWO) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Q2 Holdings

What Is Q2 Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Q2 Holdings had US$491.5m in debt in June 2024; about the same as the year before. However, it also had US$372.1m in cash, and so its net debt is US$119.4m.

How Healthy Is Q2 Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Q2 Holdings had liabilities of US$201.2m due within 12 months and liabilities of US$567.2m due beyond that. Offsetting this, it had US$372.1m in cash and US$68.2m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$328.1m.

Of course, Q2 Holdings has a market capitalization of US$4.30b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Q2 Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Q2 Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 9.5%, to US$655m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Q2 Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost US$69m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of US$68m into a profit. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Q2 Holdings is showing 3 warning signs in our investment analysis , you should know about...

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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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.