Health Check: How Prudently Does Logan Group (HKG:3380) Use Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Logan Group Company Limited (HKG:3380) 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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

How Much Debt Does Logan Group Carry?

As you can see below, Logan Group had CN¥106.6b of debt at December 2024, down from CN¥112.7b a year prior. However, it also had CN¥8.65b in cash, and so its net debt is CN¥97.9b.

How Strong Is Logan Group's Balance Sheet?

According to the last reported balance sheet, Logan Group had liabilities of CN¥157.8b due within 12 months, and liabilities of CN¥30.0b due beyond 12 months. On the other hand, it had cash of CN¥8.65b and CN¥27.3b worth of receivables due within a year. So it has liabilities totalling CN¥151.8b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥4.12b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Logan Group would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Logan Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts .

View our latest analysis for Logan Group

Over 12 months, Logan Group made a loss at the EBIT level, and saw its revenue drop to CN¥23b, which is a fall of 51%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Logan Group's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥6.5b 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. 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 CN¥6.3b 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 2 warning signs for Logan Group you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.