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Is QinetiQ Group plc (LON:QQ.) As Strong As Its Balance Sheet Indicates?

Veer Mallick

Small and large cap stocks are widely popular for a variety of reasons, however, mid-cap companies such as QinetiQ Group plc (LON:QQ.), with a market cap of UK£1.6b, often get neglected by retail investors. However, history shows that overlooked mid-cap companies have performed better on a risk-adjusted manner than the smaller and larger segment of the market. This article will examine QQ.’s financial liquidity and debt levels to get an idea of whether the company can deal with cyclical downturns and maintain funds to accommodate strategic spending for future growth. Note that this commentary is very high-level and solely focused on financial health, so I suggest you dig deeper yourself into QQ. here.

See our latest analysis for QinetiQ Group

Does QQ. face the risk of succumbing to its debt-load?

A debt-to-equity ratio threshold varies depending on what industry the company operates, since some requires more debt financing than others. A ratio below 40% for mid-cap stocks is considered as financially healthy, as a rule of thumb. For QinetiQ Group, investors should not worry about its debt levels because the company has none! It has been operating its business with zero debt and utilising only its equity capital. Investors’ risk associated with debt is virtually non-existent with QQ., and the company has plenty of headroom and ability to raise debt should it need to in the future.

LSE:QQ. Historical Debt December 24th 18

Does QQ.’s liquid assets cover its short-term commitments?

Given zero long-term debt on its balance sheet, QinetiQ Group has no solvency issues, which is used to describe the company’s ability to meet its long-term obligations. However, another measure of financial health is its short-term obligations, which is known as liquidity. These include payments to suppliers, employees and other stakeholders. With current liabilities at UK£302m, it appears that the company has been able to meet these commitments with a current assets level of UK£435m, leading to a 1.44x current account ratio. Usually, for Aerospace & Defense companies, this is a suitable ratio since there is a bit of a cash buffer without leaving too much capital in a low-return environment.

Next Steps:

QQ. has zero-debt in addition to ample cash to cover its near-term liabilities. Its safe operations reduces risk for the company and its investors, but some degree of debt may also ramp up earnings growth and operational efficiency. This is only a rough assessment of financial health, and I’m sure QQ. has company-specific issues impacting its capital structure decisions. You should continue to research QinetiQ Group to get a more holistic view of the stock by looking at:

  1. Future Outlook: What are well-informed industry analysts predicting for QQ.’s future growth? Take a look at our free research report of analyst consensus for QQ.’s outlook.
  2. Valuation: What is QQ. worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether QQ. is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at