Is Steve Leung Design Group (HKG:2262) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We note that Steve Leung Design Group Limited (HKG:2262) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Steve Leung Design Group

What Is Steve Leung Design Group's Net Debt?

As you can see below, at the end of June 2022, Steve Leung Design Group had HK$50.0m of debt, up from HK$35.2m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$181.1m in cash, so it actually has HK$131.1m net cash.

How Healthy Is Steve Leung Design Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Steve Leung Design Group had liabilities of HK$162.2m due within 12 months and liabilities of HK$14.3m due beyond that. Offsetting these obligations, it had cash of HK$181.1m as well as receivables valued at HK$264.8m due within 12 months. So it actually has HK$269.5m more liquid assets than total liabilities.

This luscious liquidity implies that Steve Leung Design Group's balance sheet is sturdy like a giant sequoia tree. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that Steve Leung Design Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Steve Leung Design Group's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Steve Leung Design Group had a loss before interest and tax, and actually shrunk its revenue by 8.5%, to HK$420m. We would much prefer see growth.

So How Risky Is Steve Leung Design Group?

While Steve Leung Design Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$61m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 3 warning signs with Steve Leung Design Group (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.