Is Star Group Asia (HKG:1560) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 should shareholders be worried about its use of debt?

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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. 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, 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.

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$2.25b over a year. However, it also had HK$30.8m in cash, and so its net debt is HK$1.34b.

A Look At Star Group Asia's Liabilities

We can see from the most recent balance sheet that Star Group Asia had liabilities of HK$1.52b falling due within a year, and liabilities of HK$152.0m due beyond that. Offsetting this, it had HK$30.8m in cash and HK$46.2m in receivables that were due within 12 months. So its liabilities total HK$1.60b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$77.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Star Group Asia will need earnings to service that debt. 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.

See our latest analysis for Star Group Asia

In the last year Star Group Asia had a loss before interest and tax, and actually shrunk its revenue by 8.9%, to HK$1.1b. 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$429m. 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're not very excited about owning this stock. Its too risky for us. 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. Case in point: We've spotted 3 warning signs for Star Group Asia you should be aware of, and 2 of them shouldn't be ignored.

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.

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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.