These 4 metrics indicate that Queen’s Road Capital Investment (CVE:QRC) is using debt reasonably well

David Iben said it well when he said: “Volatility is not a risk that interests us. What matters to us is to avoid the permanent loss of capital. When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. Like many other companies Queen’s Road Capital Investment Ltd. (CVE: QRC) resorts to debt. But should shareholders worry about its use of debt?

When is debt a problem?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. If things go really bad, lenders can take over the business. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. When we look at debt levels, we first consider cash and debt levels, together.

Check out our latest analysis for Queen’s Road Capital Investment

What is Queen’s Road Capital Investment net debt?

As you can see below, at the end of February 2022, Queen’s Road Capital Investment had $16.4 million in debt, up from none a year ago. Click on the image for more details. However, his balance sheet shows that he holds $80.7 million in cash, so he actually has $64.3 million in net cash.

debt-equity-history-analysis

How strong is Queen’s Road Capital Investment’s balance sheet?

According to balance sheet data, Queen’s Road Capital Investment had liabilities of US$17.0 million due within 12 months, but no longer term liabilities. On the other hand, it had a cash position of $80.7 million and $621.5 k of receivables due within one year. He can therefore boast of having $64.2 million in cash more than total Passives.

This excess liquidity suggests that Queen’s Road Capital Investment is taking a cautious approach to leverage. Given that he has easily sufficient short-term cash, we don’t think he will have any problems with his lenders. In summary, Queen’s Road Capital Investment has clean cash, so it’s fair to say that it is not heavily leveraged!

In contrast, Queen’s Road Capital Investment’s EBIT has fallen 13% over the past year. If this rate of decline in profits continues, the company could find itself in a difficult situation. There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; as Queen’s Road Capital Investment will need income to repay this debt. So if you want to know more about his earnings, it might be worth checking out. this chart of its long-term earnings trend.

Finally, a business needs free cash flow to pay off its debts; book profits are not enough. Queen’s Road Capital Investment may have net cash on the balance sheet, but it is always interesting to see how well the business converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its needs and its ability to manage debt. Over the past two years, Queen’s Road Capital Investment has had negative free cash flow, in total. Debt is much riskier for companies with unreliable free cash flow, so shareholders must hope that past spending will produce free cash flow in the future.

Summary

While we sympathize with investors who find debt a concern, you should keep in mind that Queen’s Road Capital Investment has net cash of US$64.3 million, as well as more liquid assets than passive. We are therefore not concerned about the use of Queen’s Road Capital Investment debt. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks reside on the balance sheet, far from it. Example: we have identified 2 warning signs for Queen’s Road Capital Investment you should be aware.

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.

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