Q2 Holdings (NYSE:QTWO) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Q2 Holdings, Inc. (NYSE:QTWO) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Q2 Holdings

How Much Debt Does Q2 Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Q2 Holdings had US$490.0m of debt in September 2023, down from US$668.0m, one year before. However, because it has a cash reserve of US$290.8m, its net debt is less, at about US$199.2m.

How Healthy Is Q2 Holdings' Balance Sheet?

The latest balance sheet data shows that Q2 Holdings had liabilities of US$176.1m due within a year, and liabilities of US$562.1m falling due after that. Offsetting these obligations, it had cash of US$290.8m as well as receivables valued at US$55.3m due within 12 months. So its liabilities total US$392.1m more than the combination of its cash and short-term receivables.

Of course, Q2 Holdings has a market capitalization of US$2.46b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. 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 11%, to US$609m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Q2 Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost US$100m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any 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$80m into a profit. So we do think this stock is quite risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Q2 Holdings 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.