Here's Why Standard Development Group (HKG:1867) Can Manage Its Debt Despite Losing Money

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Standard Development Group Limited (HKG:1867) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Standard Development Group

How Much Debt Does Standard Development Group Carry?

As you can see below, at the end of March 2023, Standard Development Group had HK$14.9m of debt, up from HK$13.4m a year ago. Click the image for more detail. But it also has HK$153.4m in cash to offset that, meaning it has HK$138.5m net cash.

How Healthy Is Standard Development Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Standard Development Group had liabilities of HK$103.9m due within 12 months and liabilities of HK$727.0k due beyond that. Offsetting this, it had HK$153.4m in cash and HK$101.9m in receivables that were due within 12 months. So it can boast HK$150.6m more liquid assets than total liabilities.

This surplus strongly suggests that Standard Development Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Standard Development Group boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Standard Development Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Standard Development Group wasn't profitable at an EBIT level, but managed to grow its revenue by 116%, to HK$661m. So there's no doubt that shareholders are cheering for growth

So How Risky Is Standard Development Group?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Standard Development Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of HK$18m and booked a HK$8.8m accounting loss. With only HK$138.5m on the balance sheet, it would appear that its going to need to raise capital again soon. Importantly, Standard Development Group's revenue growth is hot to trot. While unprofitable companies can be risky, they can also grow hard and fast in those pre-profit years. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Standard Development Group (of which 2 shouldn't be ignored!) you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.