Q Technology (Group) (HKG: 1478) could easily take on more debt
Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say “The biggest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital”. It is only natural to consider a company’s balance sheet when looking at its level of risk, as debt is often involved when a business collapses. Above all, Q Technology (Group) Company Limited (HKG: 1478) carries a debt. But does this debt worry shareholders?
What risk does debt entail?
Generally speaking, debt only becomes a real problem when a company cannot repay it easily, either by raising capital or with its own cash flow. In the worst case scenario, a business can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, many companies use debt to finance their growth without negative consequences. The first step in examining a company’s debt levels is to consider its cash flow and debt together.
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What is the debt of Q Technology (Group)?
You can click on the graph below for the historical figures, but it shows that Q Technology (Group) had a debt of CN 1.64 billion in June 2021, up from CN 2.13 billion a year earlier. However, he also had CN 1.30 billion in cash, so his net debt was CN 338.2 million.
How strong is Q Technology (Group) ‘s balance sheet?
We can see from the most recent balance sheet that Q Technology (Group) had liabilities of CN 7.63 billion due within one year, and liabilities of CN 278.5 million due within one year. -of the. In return, he had CN 1.30 billion in cash and CN 4.24 billion in receivables due within 12 months. Its liabilities are therefore CN 2.36 billion more than the combination of its cash and short-term receivables.
Q Technology (Group) has a market cap of CN ¥ 10.5b, so it could most likely raise cash to improve its balance sheet, should the need arise. But it is clear that it is absolutely necessary to take a close look at whether it can manage its debt without dilution.
We use two main ratios to inform us about the levels of debt compared to earnings. The first is net debt divided by earnings before interest, taxes, depreciation, and amortization (EBITDA), while the second is the number of times its profit before interest and taxes (EBIT) covers its interest expense (or its coverage of interest, for short). Thus, we consider debt versus earnings with and without amortization charges.
The net debt of Q Technology (Group) is only 0.19 times its EBITDA. And its EBIT covers its interest costs a whopping 84.9 times. We could therefore say that he is no more threatened by his debt than an elephant is by a mouse. On top of that, we are happy to report that Q Technology (Group) has increased its EBIT by 60%, reducing the specter of future debt repayments. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Q Technology (Group) can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
But our last consideration is also important, because a business cannot pay its debts with paper profits; he needs hard cash. We therefore always check how much of this EBIT is converted into free cash flow. Fortunately for all shareholders, Q Technology (Group) has actually generated more free cash flow than EBIT over the past three years. This kind of solid money conversion makes us as excited as the crowd when the beat drops at a Daft Punk concert.
Our point of view
The good news is that Q Technology (Group) ‘s demonstrated ability to cover interest costs with EBIT delights us like a fluffy puppy does a toddler. And this is only the beginning of good news as its conversion from EBIT to free cash flow is also very encouraging. Considering this range of factors, it seems to us that Q Technology (Group) is quite cautious with its debt, and the risks appear to be well under control. We are therefore not worried about the use of a small leverage on the balance sheet. When analyzing debt levels, the balance sheet is the obvious starting point. But at the end of the day, every business can contain risks that exist off the balance sheet. For example – Q Technology (Group) a 1 warning sign we think you should be aware.
If you are interested in investing in companies that can generate profits without the burden of debt, check out this page free list of growing companies that have net cash on the balance sheet.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.
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