The external fund manager backed by Berkshire Hathaway’s Charlie Munger, Li Lu, makes no bones about it when he says ‘The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, QPR Software Oyj (HEL:QPR1V) does carry debt. But the real question is whether this debt is making the company risky.
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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 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 QPR Software Oyj
How Much Debt Does QPR Software Oyj Carry?
As you can see below, at the end of December 2021, QPR Software Oyj had €1.68m of debt, up from €700.0k a year ago. Click the image for more detail. However, it also had €441.0k in cash, and so its net debt is €1.24m.
How Strong Is QPR Software Oyj’s Balance Sheet?
According to the balance sheet data, QPR Software Oyj had liabilities of €5.37m due within 12 months, but no longer term liabilities. Offsetting this, it had €441.0k in cash and €2.69m in receivables that were due within 12 months. So its liabilities total €2.24m more than the combination of its cash and short-term receivables.
Since publicly traded QPR Software Oyj shares are worth a total of €15.9m, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is QPR Software Oyj’s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it’s definitely worth looking at the earnings trend. Click here for an interactive snapshot.
Over 12 months, QPR Software Oyj saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that’s not too bad, we’d prefer see growth.
Caveat Emptor
Over the last twelve months QPR Software Oyj produced an earnings before interest and tax (EBIT) loss. Indeed, it lost €1.2m 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. However, it doesn’t help that it burned through €250k of cash over the last year. So suffice it to say we do consider the stock to be risky. There’s no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we’ve discovered 4 warning signs for QPR Software Oyj (1 is a bit concerning!) that you should be aware of before investing here.
When all is said and done, sometimes its easier to focus on companies that don’t even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.