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Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that Questerre Energy Corporation (TSE:QEC) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Questerre Energy
How Much Debt Does Questerre Energy Carry?
You can click the graphic below for the historical numbers, but it shows that Questerre Energy had CA$7.42m of debt in September 2021, down from CA$16.2m, one year before. However, it does have CA$10.9m in cash offsetting this, leading to net cash of CA$3.52m.
A Look At Questerre Energy's Liabilities
Zooming in on the latest balance sheet data, we can see that Questerre Energy had liabilities of CA$12.7m due within 12 months and liabilities of CA$21.0m due beyond that. Offsetting these obligations, it had cash of CA$10.9m as well as receivables valued at CA$3.45m due within 12 months. So its liabilities total CA$19.4m more than the combination of its cash and short-term receivables.
This deficit isn't so bad because Questerre Energy is worth CA$64.3m, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, Questerre Energy boasts net cash, so it's fair to say it does not have a heavy debt load!
Although Questerre Energy made a loss at the EBIT level, last year, it was also good to see that it generated CA$5.5m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Questerre Energy can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.