Is Luen Wong Group Holdings (HKG:8217) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Luen Wong Group Holdings Limited (HKG:8217) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Luen Wong Group Holdings

What Is Luen Wong Group Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that Luen Wong Group Holdings had debt of HK$107.0m at the end of September 2021, a reduction from HK$132.9m over a year. On the flip side, it has HK$46.7m in cash leading to net debt of about HK$60.2m.

A Look At Luen Wong Group Holdings' Liabilities

We can see from the most recent balance sheet that Luen Wong Group Holdings had liabilities of HK$126.6m falling due within a year, and liabilities of HK$12.1m due beyond that. On the other hand, it had cash of HK$46.7m and HK$114.5m worth of receivables due within a year. So it can boast HK$22.5m more liquid assets than total liabilities.

This surplus liquidity suggests that Luen Wong Group Holdings' balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is Luen Wong Group Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Luen Wong Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$116m, which is a fall of 57%. To be frank that doesn't bode well.

Caveat Emptor

While Luen Wong Group Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost HK$6.5m at the EBIT level. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. So it seems too risky for our taste. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 5 warning signs for Luen Wong Group Holdings (3 are a bit concerning!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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