When we say no - Qoria case study

Over the years we’ve shared numerous investment ideas on Livewire, outlining the characteristics we look for in a promising investment.

But that alone ignores the other critical piece to good investing. At HD Capital Partners, Dan and I say no to 99% of the situations we look at, much to the frustration of our broker friends.

It is not just about finding and holding the winners, but also avoiding the losers to the extent possible, noting that everyone will make mistakes, but limiting the damage is crucial.

A couple of weeks ago, a friend tipped me a handful of stocks as potential buys, one of which was Qoria Ltd (ASX:QOR). It screened as an interesting business with good growth, impressive metrics, management with skin in the game and positive guidance.

Interesting!

In the end we passed on investing in Qoria, for reasons I’ll explain that I hope prove to be insightful.

To be clear, this is not picking on Qoria, nor is it a view on the stock from here, having fallen -40% since our point in time analysis and with market sentiment shifting quickly to bearishness.

Instead, it’s an attempt to help educate on how we try to avoid the blow ups in seemingly attractive situations by applying some of the analysis in our investment process.

In fact, the reason we are using Qoria for this analysis is that it is a real and growing business of scale without any obvious red flags, and so is hopefully educational for readers.

And for the avoidance of doubt, we have no position in QOR.

A Quick Qoria Overview

Qoria is a provider of software and services designed to help schools and parents monitor, protect and educate children both in the physical and digital worlds. There are some good write ups on the business if you hit the Livewire search bar.

Like I said, this is a real business. ARR has grown from $47m to $150m over 5 years through a combination of organic and acquired growth. They serve 32,000 schools, operate globally and until recently it was capped at over A$700m.

The board own approx. 3-4% of the company, which doesn’t sound like much, but at recent prices represented >$20m of stock. Good to see.

So why did we say no?

Downside First

To understand why we said no to a business with apparent potential upside like QOR, you need to understand our investment strategy.

At HD Capital Partners, in every investment opportunity we look at, we think about downside risk first. This is step one, and if we can’t get comfortable on that, there simply is no step two.

“Look down, not up, when making your initial investment decision. If you don’t lose money, most of the remaining alternatives are good ones.”
- Joel Greenblatt

This isn’t some marketing gimmick we tell our investors just to comfort them. This is the result of genuine alignment and an intense care for ours and our investors’ capital.

My personal stake in our Fund is my largest financial investment – by far – and sits right alongside the capital of our investors. I have consistently added to it over the nearly eight years we’ve been in operation, most recently at the December quarter.

It is my family’s nest egg.

Our clients have already built real wealth through successful careers, building businesses or making savvy investments and while they certainly want us to grow their wealth at a reasonable clip, their primary objective above all else, is to stay wealthy.

Those two things engrain a deep focus at HD for prioritising downside risk, first and foremost. So, if an investment has greater downside risk than we are comfortable taking, it’s an easy pass.

Important to note is that we think about downside risk as the risk of permanent loss of capital, not simply a falling stock price.

Which brings us to our first reason to why we said ‘no’ to QOR.

Cashflow Above All Else

Very early in my career, I worked for a highly experienced Senior Analyst in Sydney who defined the role of an investor or analyst as “understanding how cash flows in, through, and back out of a business.”

He built his own custom financial models that reflected this, rather than relying on reported results or accounting profits. He insisted if you don’t completely understand a company’s cash flows, you don’t have the right to buy the stock.

I was lucky to have this hammered home early in my career. Since then, I’ve seen it ring true through various market jitters, crises and company mishaps.

But it’s not only a fantastic downside protection tool to focus on cashflow. Studies suggest that cashflow, or the growth in a company’s cash balance, is the most powerful predictor of outsized investment returns amongst listed stocks, beating out the investor favourite ‘revenue growth’ (Bessembinder, Hendrik (2020). Extreme Stock Market Performers, Part III: What are their Observable Characteristics?)

In bull markets, narrative and excitement often usurp cash flow as the primary focus for investors. Other, more fungible metrics like ARR or ‘Rule of 40’ start to get more attention.

But let me tell you, in the end, cash flow always matters – it’s just a matter of when.

And you’ll be amazed how quickly the market can shift from ‘wow look at that growth’ to ‘are you running out of cash?’

When we looked at QOR, we noted the company was flagging $15m of EBITDA for FY25. We also noticed that many of the bulls on this stock highlighted EBITDA and rule of 40 (which inherently relies on EBITDA margin as a component to the calculation) over other key metrics.

Our analysis, using our own methodology, of actual Free Cash Flow (FCF) for FY25 looked like this:

To date QOR had been a cash burning business, with ~$20m of FCF burned in FY25 using a simple analysis. The reported EBITDA of $15m was nowhere near an accurate reflection of the company’s underlying earnings – at least the way we assess businesses.

To managements sincere credit, we noted they’d recently implemented a ‘Cash EBITDA’ metric into their incentive targets to acknowledge this. That’s encouraging.

This figure came to -$6.7m in FY25. Trading Cash Flow, which typically adjusts for working capital swings, came to -$13.5m. Both shown below.

By itself, there’s nothing inherently wrong with a cash burning business. Occasionally, it’s the best (or only) strategy a company can opt for.

But when it’s combined with the next reason we found for saying ‘no’ it can be a recipe for disaster.

We Want Bulletproof Balance Sheets

As a rule, we avoid businesses with indebted balance sheets. We have been around long enough to see the damage that even modest levels of debt can do to otherwise well managed, good businesses when things go wrong.

And over a long enough time frame, things do go wrong. A bad quarter or two is just life in business. Analysts are often too harsh on company management teams based on short term results. Shit happens.

The best protection an investor can have is a bulletproof balance sheet.

Debt has its place. But net debt for a company with historically significant cash burn is well above our own risk tolerance.

When we looked at QOR, they had a debt facility of around $50m, fully drawn. It is secured over all assets with covenants including standard financial ratios (presumably net debt/EBITDA, interest cover), minimum cash balance, ARR to debt ratio, and ARR to EBITDA ratio. This information can be found in the Annual Report.

Offsetting this at 30 Sep 2025 was a cash balance of $24m, which is how we get to net debt of ~$30m.

We don’t know the exact covenants, for example how much cash is truly ‘free’ or how much room there is for EBITDA to decline before the company trips a covenant. We would guess it is fairly friendly debt.

Instead, can run a sensitivity analysis to assess the risk. This is not about forecasting nor expecting a decline in the business, but rather understanding the risks we are taking as investors should that happen.

The below revenue sensitivity analysis assumed QOR’s FY25 revenue base ($118m), gross margin of 92% and a stable cost base to assess the potential impact a change in revenue has on EBITDA.

Then we compared that potential change in revenue and reported EBITDA to the potential impact on standard leverage ratios, in this case we used Net Debt/EBITDA.

Based on the above assumptions, just a -5% revenue decline would have led to a -35% decline in reported EBITDA and material impacts to leverage ratios like Net Debt/EBITDA.

Everyone has their own risk profile, and the above analysis does not at all suggest QOR was in any financial stress at the time.

Rather our point was that the balance sheet and operating leverage meant it was exposed to any material slowdown or decline in performance, a risk we weren’t willing to take.

Of course, the bulls would argue that this leverage works on the upside too, which is totally correct, as a +5% revenue growth would lead to a +35% EBITDA uplift all else equal, and leverage ratios continuing to be very comfortable.

That’s all well and good, so long as you were aware it was a risk you were underwriting.

Rewind a few weeks ago and nobody was worried about QOR’s debt. We did not have a crystal ball and certainly didn’t foresee the most recent quarter’s performance.

But we did at least foresee the possibility of that occurring, and pass on the investment as a result, avoiding considerable financial pain at the date of this writing.

On the conference call for the most recent quarter, many of the questions were about cash flow, the balance sheet and the debt.

I went back and read the transcript for the September quarterly call. The total number of questions on debt and cashflow? One about cash flow. None about debt.

Market sentiment can shift quickly from greed to fear.

Sense Check – Peer Analysis

A staple in our process whenever we analyse a business is to compare it to its peers.

Things like growth rates, retention, margins, free cash flow, leverage ratios and valuations.

Any outlier is then worth digging deeper to understand why it’s there, is it sustainable or does it create an opportunity?

Luckily for us, QOR has a big brother in Life360 (ASX:360), a similar although not identical business, that allows us to sense check some of the financial metrics.

We ran through all of them. One stood out most. Capitalised development spend.

Here’s QOR’s capitalised development spend in each of the last two financial years (FY24 and FY25). It’s running at A$20m per annum.

The September 2025 quarter suggested that run rate would continue.

Then there is 360. Below is pulled from their 2024 annual report, showing US$4m of annual capitalised dev spend.

That is for a business that at the time was generating roughly 4x the revenue QOR generates today.

In total 360 spent well north of A$100m+ on R&D that year, but most of that was expensed rather than capitalised. This suggests to us that the A$20m QOR is capitalising is potentially a cost of doing business, will probably need to recur every year into perpetuity and that we needed to account for that in our calculation of normalised earnings.

There’s absolutely nothing wrong with R&D spend – it’s necessary. But the above simply highlights that reported EBITDA is an irrelevant metric for this business and needs to be considered when using metrics like Rule of 40 or when comparing to peers.

The lesson here is to ensure you’re comparing apples to apples by sense checking against peers to identify any anomalies, both bullish and bearish.

What Was The Upside?

Almost every investment has a risk of potential loss. There is no free lunch.

Your job as an investor is to assess that downside risk against the size and likelihood of the upside on offer, consider if it meets your risk profile and then size the position appropriately.

Let’s assume for argument’s sake we had gotten comfortable with the downside risks mentioned above. What was the upside on offer at QOR if all went well?

The issue for us was that the upside on offer, at a price around 55c, was not sufficient to justify the risk we would have been required to take.

As mentioned earlier, in bull markets like today, investors focus on metrics like ARR multiples and Rule of 40, arbitrarily comparing some of the greatest businesses in the world to others of lower quality.

But it is very important to remember that these are just shorthand valuation tools that make no adjustment for critical factors like growth rates, gross margin, retention, earnings margins, scalability, earnings quality, cash flow conversion or even strategic value.

At best they are simple tools that have their place, particularly for cash burning technology companies. At worst, they are dangerous.

Prior to the recent decline, QOR had approx. 1.3b shares on issue and was trading at around 55c, for a market cap of A$715m. Add the A$30m net debt to get EV of A$745m.

Let’s round up ARR at the time and call it A$150m. That’s an EV/ARR multiple of 5x.

The below, from Bessemer Venture Partners, outlines EV/Forward Revenue multiples for US SaaS stocks.

Note that the median is approximately 4-5x. To be up near 8x, you need to be Top Quartile and typically represent best of class metrics for things like growth and retention.

QOR is a good business, but in our view, it does not compare to some of the companies in that top quartile. Gross retention, for example, in its Qustodio business (albeit a much smaller part of the group) is closer to 75% vs mid 90% or higher for best-in-class peers.

I recall reading research from Aussie based Latimer Partners in March 2025 that noted median takeover multiples for small cap tech were in the 4-5x revenue range at the time of the analysis.

Interestingly, QOR itself received a takeover bid from private equity firm K1 in early 2024. The bid, disclosed as 40c/share, implied an EV of $500m. With ARR at the time of $112m, that’s EV/ARR of 4.5x.

It’s bigger, faster growing, more profitable peer in Life360 trades around 7x EV/ARR, but a premium of some sort is probably justified – something I think even the QOR bulls would agree with.

All indications point to 5x ARR (or forward revenue as a reasonable proxy in this case) as being roughly the right number.

With a 55c share price at the time, or 5x, we just didn’t see sufficient upside, even if we had been comfortable with the downside risk.

The implied bet you had to make as a bull at that price level was that QOR is an elite business deserving of a top quartile multiple that would continue to grow without hiccup and with rapidly improving cash generation. That could well happen from here and the Company’s FY26 guidance suggests it might, but it’s not a risk we were willing to take at the time of our analysis.

Again, we want to note the point in time analysis of this piece. After the recent decline, QOR trades at closer to ~3x EV/ARR – a very different proposition and a discount to where QOR received the prior takeover bid.

Find What Works For You and Remain Disciplined

At HD, we know our risk profile, and we remain disciplined in applying it in our investment process.

Implicit in this is an acknowledgment that we don’t know the future - neither do the management teams running these businesses who are simply doing the best they can - and we should make an accurate assessment of the risk based on a variety of potential future outcomes, not just the most optimistic one.

That means we say ‘no’ a lot. Occasionally it will mean we say no to some investments that turn out to be amazing winners, a group to which we genuinely hope QOR belongs in the years ahead.

But we rest easy knowing that by being disciplined we give ourselves the best chance of avoiding the blow ups and ensure that we, and our investors with their capital alongside ours, stay wealthy first and foremost, and then grow our capital from there.

It’s this process that has allowed us to outperform the market materially in the almost eight years that we’ve been in operation.