Does Lever Style (HKG:1346) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Lever Style Corporation (HKG:1346) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Lever Style

What Is Lever Style's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Lever Style had US$24.6m of debt, an increase on US$13.9m, over one year. But on the other hand it also has US$37.1m in cash, leading to a US$12.5m net cash position.

How Strong Is Lever Style's Balance Sheet?

We can see from the most recent balance sheet that Lever Style had liabilities of US$47.5m falling due within a year, and liabilities of US$3.23m due beyond that. On the other hand, it had cash of US$37.1m and US$18.3m worth of receivables due within a year. So it can boast US$4.64m more liquid assets than total liabilities.

This surplus suggests that Lever Style has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Lever Style boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that Lever Style grew its EBIT by 14,998% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Lever Style 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Lever Style may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Lever Style created free cash flow amounting to 7.9% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Lever Style has net cash of US$12.5m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 14,998% over the last year. So is Lever Style's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 4 warning signs for Lever Style (of which 1 can'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.