David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Steve Leung Design Group Limited (HKG:2262) does carry debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Steve Leung Design Group
How Much Debt Does Steve Leung Design Group Carry?
You can click the graphic below for the historical numbers, but it shows that Steve Leung Design Group had HK$20.0m of debt in June 2024, down from HK$30.0m, one year before. But on the other hand it also has HK$99.6m in cash, leading to a HK$79.6m net cash position.
How Strong Is Steve Leung Design Group's Balance Sheet?
We can see from the most recent balance sheet that Steve Leung Design Group had liabilities of HK$136.0m falling due within a year, and liabilities of HK$23.3m due beyond that. On the other hand, it had cash of HK$99.6m and HK$252.5m worth of receivables due within a year. So it actually has HK$192.8m more liquid assets than total liabilities.
This surplus strongly suggests that Steve Leung Design Group has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, Steve Leung Design Group boasts net cash, so it's fair to say it does not have a heavy debt load!
Notably, Steve Leung Design Group made a loss at the EBIT level, last year, but improved that to positive EBIT of HK$433k in the last twelve months. There's no doubt that we learn most about debt from the balance sheet. 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Steve Leung Design Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Steve Leung Design Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
While we empathize with investors who find debt concerning, you should keep in mind that Steve Leung Design Group has net cash of HK$79.6m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$21m, being 4,947% of its EBIT. So we don't think Steve Leung Design Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 2 warning signs we've spotted with Steve Leung Design Group (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.