Q-Free’s capital management policy is to support long-term growth in EBITDA and Cash Flow from operations. The Board aims to maintain a healthy balance between liabilities and equity. Q-Free assesses its operational gearing (Net Interest Bearing Debt/Earnings Before Interest, Taxes and depreciation/ amortisation) and the Group’s equity ratio. The Group’s target is to have an equity ratio of 40 % or more and maximum operational gearing of 3.0.
Q-Free manages its liquidity and funding centrally to cover short and long-term capital needs. The Group is currently implementing a global cash pool where all wholly owned subsidiaries participate to the extent permitted by country legislation. The cash pool arrangements facilitate netting of cash positions within the Group reducing the external financing need and interest cost, and centralizing management of aggregated positions at the mother company.
The responsibility for funding, cash and financial risk management is handled centrally by the finance department. Q-Free aims to limit its exposure to financial risk. The Group is exposed to different financial market risks arising from normal business activities, primarily these risks are:
- Credit risk
- Currency risk
- Liquidity risk
- Interest rate risk
a) Credit risk
Risk related to a customer’s ability to fulfill their financial obligations is generally considered to be low, given that the Group’s customers are primarily government-controlled entities or relatively large and financial stable private companies. The Group has a historically low level of credit losses on accounts receivable.
b) Currency risk
Q-Free Group companies are exposed to currency risk in the ordinary course of business when sales or expenses are incurred in a currency other than the functional currency of the company. The Group’s most important trading currencies are NOK, USD, GBP and EUR, and during the reporting period most Q-Free entities have engaged in transactions with currency exposure risk. The Group’s policy is to denominate payment terms in customer and supplier contracts whenever possible in the local currency. As of 31 December 2018 and 2017, the Group did not own any foreign currency derivatives or have any explicit economic hedges in place to manage currency risk. See note 5 in the 2018 annual report for currency sensitivity analyses.
c) Liquidity risk
Liquidity risk is the risk that Q-Free will not be able to meet its financial obligations as they fall due. The Group manages liquidity through an ongoing review of future commitments. Management’s strategy is to hold sufficient cash, cash equivalents, or undrawn credit facilities at any time to be able to finance Group operations, planned investments, and obligations. Surplus cash funds are deposited in banks, or invested in money market funds, with the purpose of securing an acceptable, low-risk return on the invested capital.
d) Interest-rate risk
The Group is exposed to interest rate risk in the form of changing interest rates on borrowings with floating interest rates. The Group has interest-bearing debt and interest rate risk related to its long-term bank borrowings and short-term credit lines. Management emphasizes predictability at all times if entering into any significant new interest bearing debt contracts, as changes in the interest level affect profit before taxes. Management regularly evaluates the need for active hedging of interest rate risk. As of 31.12.18 and 31.12.2017, the Group did not own any interest rate derivatives or have any explicit economic hedges in place to manage interest rate risk.
Information on the company’s debt financing
As of December 2018, the Q-Free Group had secured a three-year Term Loan from Nordea (annual amortization of 15 MNOK). On top of the term loan the Group secured a three-year Revolving credit facility (RCF) of 100 MNOK and an 100 MNOK overdraft facility. See note 7 in the 2018 annual report for more detailed information around the Groups external debt financing.