Is Star Group Asia (HKG:1560) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, Star Group Asia Limited (HKG:1560) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. 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 Star Group Asia

How Much Debt Does Star Group Asia Carry?

You can click the graphic below for the historical numbers, but it shows that Star Group Asia had HK$1.86b of debt in June 2024, down from HK$3.10b, one year before. Net debt is about the same, since the it doesn't have much cash.

How Strong Is Star Group Asia's Balance Sheet?

The latest balance sheet data shows that Star Group Asia had liabilities of HK$2.07b due within a year, and liabilities of HK$140.0m falling due after that. Offsetting this, it had HK$23.7m in cash and HK$148.5m in receivables that were due within 12 months. So it has liabilities totalling HK$2.03b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the HK$98.8m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Star Group Asia would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Star Group Asia'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.

Over 12 months, Star Group Asia made a loss at the EBIT level, and saw its revenue drop to HK$1.6b, which is a fall of 4.1%. That's not what we would hope to see.

Caveat Emptor

Importantly, Star Group Asia had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping HK$263m. 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. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it lost HK$483m in the last year. So we think buying this stock is risky. 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. To that end, you should learn about the 3 warning signs we've spotted with Star Group Asia (including 1 which doesn't sit too well with us) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.