Howard Marks put it well when he said that, rather than worrying about stock price volatility, “The possibility of permanent loss is the risk I worry about … and every investor practice that I know is worried. ” When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Qiwi plc (NASDAQ: QIWI) has debt on its balance sheet. But does this debt concern 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. If things really go wrong, lenders can take over the business. 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. When we look at debt levels, we first look at cash and debt levels, together.
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What is Qiwi’s net debt?
As you can see below, at the end of September 2020, Qiwi had a debt of 1.66 billion yen, up from 1.27 billion yen a year ago. Click on the image for more details. But he also has 46.2 billion yen in cash to make up for that, which means he has 44.5 billion yen in net cash.
Is Qiwi’s track record healthy?
Zooming in on the latest balance sheet data, we can see that Qiwi had liabilities of 39.9 billion yen due within 12 months and liabilities of 3.30 billion yen beyond. In compensation for these obligations, he had cash of 46.2 billion euros as well as receivables valued at 9.55 billion euros due within 12 months. It can therefore rely on 12.6 billion more liquid assets than total Liabilities.
It is good to see that Qiwi has a lot of liquidity on its balance sheet, which suggests careful management of liabilities. Because he has a lot of assets, he is unlikely to have any problems with his lenders. In short, Qiwi has net cash, so it’s fair to say that he doesn’t have a lot of debt!
Fortunately, Qiwi has increased its EBIT by 2.6% over the past year, which makes this debt even more manageable. The balance sheet is clearly the area you need to focus on when analyzing debt. But it’s future profits, more than anything, that will determine Qiwi’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.
Finally, while the IRS may love accounting profits, lenders only accept hard cash. Qiwi may have net cash on the balance sheet, but it’s always interesting to see how well the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Fortunately for all shareholders, Qiwi 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.
While we sympathize with investors who find debt worrying, you should keep in mind that Qiwi has net cash of 44.5 billion yen, as well as more liquid assets than liabilities. The icing on the cake was that he converted 163% of that EBIT into free cash flow, which brought in 10 billion euros. So is Qiwi’s debt a risk? It does not seem to us. The balance sheet is clearly the area you need to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. Concrete example: we have spotted 3 warning signs for Qiwi you must be aware of this, and one of them must not be ignored.
At the end of the day, it’s often best to focus on businesses with no net debt. You can access our special list of these companies (all with a history of profit growth). It’s free.
This Simply Wall St article is general in nature. 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 the mentioned stocks.
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