Health Check: How Prudently Does Star Group Asia (HKG:1560) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Star Group Asia Limited (HKG:1560) makes use of debt. But the real question is whether this debt is making the company risky.

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Why Does Debt Bring Risk?

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. 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, 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.

What Is Star Group Asia's Net Debt?

The image below, which you can click on for greater detail, shows that Star Group Asia had debt of HK$1.37b at the end of December 2024, a reduction from HK$2.30b over a year. However, it also had HK$28.9m in cash, and so its net debt is HK$1.34b.

How Healthy Is Star Group Asia's Balance Sheet?

According to the last reported balance sheet, Star Group Asia had liabilities of HK$1.52b due within 12 months, and liabilities of HK$152.0m due beyond 12 months. Offsetting this, it had HK$28.9m in cash and HK$17.5m in receivables that were due within 12 months. So it has liabilities totalling HK$1.63b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$65.4m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Star Group Asia would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Star Group Asia's earnings that will influence how the balance sheet holds up in the future. 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.

Check out our latest analysis for Star Group Asia

Over 12 months, Star Group Asia made a loss at the EBIT level, and saw its revenue drop to HK$1.1b, which is a fall of 8.9%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Star Group Asia produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$429m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$605m in the last year. So we think buying this stock is risky. 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 instance, we've identified 3 warning signs for Star Group Asia (2 can't be ignored) you should be aware of.

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.