Is Luen Wong Group Holdings (HKG:8217) Weighed On By Its Debt Load?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Luen Wong Group Holdings Limited (HKG:8217) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Luen Wong Group Holdings

What Is Luen Wong Group Holdings's Debt?

The image below, which you can click on for greater detail, shows that Luen Wong Group Holdings had debt of HK$22.0m at the end of March 2023, a reduction from HK$55.0m over a year. But it also has HK$44.2m in cash to offset that, meaning it has HK$22.2m net cash.

How Strong Is Luen Wong Group Holdings' Balance Sheet?

According to the balance sheet data, Luen Wong Group Holdings had liabilities of HK$55.0m due within 12 months, but no longer term liabilities. On the other hand, it had cash of HK$44.2m and HK$59.5m worth of receivables due within a year. So it actually has HK$48.7m more liquid assets than total liabilities.

This surplus strongly suggests that Luen Wong Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Luen Wong Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Luen Wong Group Holdings will need earnings to service that debt. 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 reported revenue of HK$105m, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Luen Wong Group Holdings?

While Luen Wong Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$32m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. The next few years will be important as the business matures. 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. Case in point: We've spotted 3 warning signs for Luen Wong Group Holdings you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.