Over the last six months, Quest Resource’s shares have sunk to $1.37, producing a disappointing 13.3% loss - a stark contrast to the S&P 500’s 12.7% gain. This might have investors contemplating their next move.
Is now the time to buy Quest Resource, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Do We Think Quest Resource Will Underperform?
Even though the stock has become cheaper, we’re passing on Quest Resource for now. Here are three reasons you should be careful with QRHC, plus one stock we’d rather own.
1. Revenue Tumbling Downwards
Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Quest Resource’s recent performance marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 6.8% over the last two years. 
2. Breakeven Free Cash Flow Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Quest Resource broke even from a free cash flow perspective over the last five years, giving the company limited opportunities to return capital to shareholders.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Quest Resource’s $60.64 million of debt exceeds the $1.02 million of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $9.64 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Quest Resource could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Quest Resource can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Quest Resource doesn’t pass our quality test. After the recent drawdown, the stock trades at 7.4× forward EV-to-EBITDA (or $1.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward the most dominant software business in the world.
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