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

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 Steve Leung Design Group Limited (HKG:2262) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Steve Leung Design Group

What Is Steve Leung Design Group's Debt?

The image below, which you can click on for greater detail, shows that Steve Leung Design Group had debt of HK$30.0m at the end of June 2023, a reduction from HK$50.0m over a year. But on the other hand it also has HK$111.4m in cash, leading to a HK$81.4m net cash position.

A Look At Steve Leung Design Group's Liabilities

Zooming in on the latest balance sheet data, we can see that Steve Leung Design Group had liabilities of HK$132.1m due within 12 months and liabilities of HK$41.2m due beyond that. Offsetting this, it had HK$111.4m in cash and HK$248.6m in receivables that were due within 12 months. So it can boast HK$186.7m more liquid assets than total liabilities.

This excess liquidity is a great indication that Steve Leung Design Group's balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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 14%, to HK$362m. We would much prefer see growth.

So How Risky Is Steve Leung Design Group?

Statistically speaking companies that lose money are riskier than those that make money. And in the last year Steve Leung Design Group had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of HK$40m and booked a HK$43m accounting loss. With only HK$81.4m on the balance sheet, it would appear that its going to need to raise capital again soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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 3 warning signs for Steve Leung Design Group (2 are a bit unpleasant!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.