Steve Leung Design Group (HKG:2262) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Steve Leung Design Group Limited (HKG:2262) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Steve Leung Design Group

What Is Steve Leung Design Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Steve Leung Design Group had HK$50.0m of debt, an increase on HK$35.2m, over one year. But it also has HK$181.1m in cash to offset that, meaning it has HK$131.1m net cash.

A Look At Steve Leung Design Group's Liabilities

According to the last reported balance sheet, Steve Leung Design Group had liabilities of HK$162.2m due within 12 months, and liabilities of HK$14.3m due beyond 12 months. 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 surplus liquidity suggests that Steve Leung Design Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, Steve Leung Design Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. 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$25m. 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. There's no doubt the next few years will be crucial to how the business matures. 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. Be aware that Steve Leung Design Group is showing 2 warning signs in our investment analysis , and 1 of those makes us a bit uncomfortable...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.