2023-10-03 00:20:15 ET
Summary
- Quest Resource Holding Corporation is a waste management solutions provider based in Dallas, US.
- The company's long-term resistance may hinder its investment attractiveness at this moment in time.
- QRHC's balance sheet shows reduced cash, liquidity, and intangible assets, while long-term debt remains high.
Intro
Quest Resource Holding Corporation ( QRHC ) is a national waste management solutions provider based out of Dallas in the US. From recycling all types of material (plastics, metals, etc.) to an array of different types of automotive, food & hazardous waste management solutions, Quest has the capability to deliver tailored solutions for large companies across different industry landscapes.
If we pull up a long-term chart of Quest, we see that shares are now coming up against long-term overhead resistance. Although the stock's 10-month moving average has turned over to the downside in recent months and the long-term RSI momentum indicator is illustrating a possible bearish divergence, now (at least from a technical standpoint) may not be the time to start scaling into an investment on the long side in Quest.
Suffice it to say, if long-term resistance is not surmounted on this attempt, Quest's investment case (concerning the relationship between profitability and valuation trends) will be deemed not attractive enough for investors at this moment in time. The financial condition of a company (and associated trends) is another factor investors delve into in detail before entertaining any thought of investing in a company. One of the best ways of ascertaining the financial condition of a stock is to study the balance sheet and its recent trends. Therefore, let's delve into Quest's balance sheet to see how financially the company is compared to yesteryear.
Cash and Cash Equivalents
Quest reported $3 million in cash & ST investments at the end of its most recent second quarter. This is the lowest cash balance (by some distance - $6.8 million sequential decline) Quest has reported over the past 10 quarters. Although management pointed to its decision to carry less cash due to higher interest rates on the recent Q2 earnings call, we invariably prefer companies that carry higher cash balances as a percentage of their market caps (Quest's current market cap comes in at $146.38 million).
Current Ratio
When a company's cash balance has been reduced, it is vital to check liquidity ratios to ensure the firm has the financial wherewithal to meet its short-term obligations in the event of being hit with a curved ball. Therefore, when we divide Quest's current assets ($51.6 million) at the end of Q2 by its corresponding current liabilities ($41.1 million), we get a current ratio of 1.26. Suffice it to say, receivables now make up a larger 88%+ of the company's current assets which means the company's current ratio is at its lowest point since Q1 of 2019.
Long-Term Assets
Quest's long-term assets made up $119 million at the end of Q2. By far the biggest line items in this section are goodwill ($84.3 million) & intangible assets ($29.7 million). Goodwill is essentially the 'fat' that Quest has paid above book value in past acquisitions & intangible assets can range from anything from licensing to trademarks to patents, etc. The problem with both of these asset types (and their associated elevated dollar balances) is that they can be revised down much easier than hard assets for example (Property, Equipment, etc.). In fact, as intangible assets usually have a finite value, it is not surprising to see Quest's intangible assets steadily losing a percentage of its value with every quarter that goes by
Return On Assets
When we divide Quest's trailing net profit by its total number of assets, we get a trailing ROA of -4.64%. This is a worrying trend given the amount of goodwill and intangible assets on Quest's balance sheet at present. In fact, although Quest is expected to bounce back to positive profitability in fiscal 2024 (EPS of $0.07 per share), Quest's projected forward ROA would still come in well behind the average ROA (5%+) for this sector.
Long-Term Debt
What has been affecting Quest's return on assets & profitability in general has been the company's high leverage. Long-term debt at the end of Q2 came in at $58.9 million which means the stated debt-to-equity ratio for the company comes in at 0.85 (Share equity totaled $69.1 million at the end of Q2). Two points here that investors should be aware of. The first is that goodwill & intangible assets make up 67% of Quest's assets at present. Not all equity is made the same which means investors must ponder the validity of that 0.85 number especially if intangibles continue to come down and recent acquisitions do not live up to their billing.
The second point is that Quest's long-term debt resulted in $9.1 million of interest expense over the past four quarters of trading. This metric has been rising swiftly which means Quest's near-term sequential gross profit expansion must continue in earnest to compensate for rising expense.
Conclusion
To sum up, due to elevated investment in recent times, Quest's balance sheet trends illustrate reduced cash, liquidity & intangible assets whereas long-term debt has remained stubbornly elevated at close to $60 million. Furthermore, given the sizable amount of goodwill, Quest continues to hold on its balance sheet, projected earnings growth needs to be watched carefully going forward. We designate the stock a 'Hold' rating at present but if we see bearish death moving averages on either the weekly or monthly chart, our rating will swiftly change to a 'Sell'. We look forward to continued coverage.
For further details see:
Quest Resource: Balance Sheet Trends Point To Tough Battle Ahead