Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Mostly, QPR Software Oyj (HEL:QPR1V) is in debt. But the real question is whether this debt makes the business risky.
When is debt a problem?
Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business has is to look at its cash flow and debt together.
Check out our latest analysis for QPR Software Oyj
What is QPR Software Oyj’s debt?
As you can see below, at the end of December 2021, QPR Software Oyj had a debt of 1.68 million euros, compared to 700.0 k€ a year ago. Click on the image for more details. However, he also had €441.0k in cash, and his net debt is therefore €1.24m.
How strong is QPR Software Oyj’s balance sheet?
According to balance sheet data, QPR Software Oyj had liabilities of €5.37 million maturing within 12 months, but no longer-term liabilities. In return, it had €441.0k in cash and €2.69m in receivables due within 12 months. Its liabilities therefore total €2.24 million more than the combination of its cash and short-term receivables.
Given that publicly traded QPR Software Oyj shares are worth a total of €15.9 million, it seems unlikely that this level of liability is a major threat. But there are enough liabilities that we certainly recommend that shareholders continue to monitor the balance sheet in the future. The balance sheet is clearly the area to focus on when analyzing debt. But it is QPR Software Oyj’s earnings that will influence the balance sheet going forward. So, when considering debt, it is definitely worth looking at the earnings trend. Click here for an interactive preview.
Over 12 months, QPR Software Oyj saw its revenues remain fairly stable and did not record positive earnings before interest and taxes. While that’s not too bad, we’d rather see growth.
Over the last twelve months, QPR Software Oyj has recorded a loss of earnings before interest and taxes (EBIT). Indeed, it lost €1.2 million in EBIT. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. So we think its balance sheet is a little stretched, but not beyond repair. However, it doesn’t help that he’s burned €250,000 in cash in the last year. So suffice it to say that we consider the stock to be risky. There is no doubt that we learn the most about debt from the balance sheet. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 4 warning signs for QPR Software Oyj (1 is a bit worrying!) that you should be aware of before investing here.
In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.