We Think Quantum Foods Holdings (JSE:QFH) Can Stay On Top Of Its Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Quantum Foods Holdings Ltd (JSE:QFH) makes use of debt. But is this debt a concern to shareholders?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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 Quantum Foods Holdings

What Is Quantum Foods Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Quantum Foods Holdings had R99.4m of debt, an increase on none, over one year. But it also has R245.8m in cash to offset that, meaning it has R146.4m net cash.

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How Strong Is Quantum Foods Holdings' Balance Sheet?

According to the last reported balance sheet, Quantum Foods Holdings had liabilities of R737.5m due within 12 months, and liabilities of R383.2m due beyond 12 months. Offsetting these obligations, it had cash of R245.8m as well as receivables valued at R718.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by R156.3m.

Of course, Quantum Foods Holdings has a market capitalization of R1.45b, 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. While it does have liabilities worth noting, Quantum Foods Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although Quantum Foods Holdings made a loss at the EBIT level, last year, it was also good to see that it generated R235m in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Quantum Foods Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Quantum Foods Holdings 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. In the last year, Quantum Foods Holdings's free cash flow amounted to 47% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

Although Quantum Foods Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of R146.4m. So we don't have any problem with Quantum Foods Holdings's use of debt. 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. For example, we've discovered 4 warning signs for Quantum Foods Holdings (2 make us uncomfortable!) that you should be aware of before investing here.

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.