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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'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Steve Leung Design Group Limited (HKG:2262) does use debt in its business. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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, 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 think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Steve Leung Design Group
How Much Debt Does Steve Leung Design Group Carry?
As you can see below, at the end of December 2019, Steve Leung Design Group had HK$33.6m of debt, up from HK$20.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$273.6m in cash, so it actually has HK$240.0m net cash.
A Look At Steve Leung Design Group's Liabilities
The latest balance sheet data shows that Steve Leung Design Group had liabilities of HK$171.4m due within a year, and liabilities of HK$42.9m falling due after that. Offsetting these obligations, it had cash of HK$273.6m as well as receivables valued at HK$279.0m due within 12 months. So it can boast HK$338.3m more liquid assets than total liabilities.
This surplus suggests that Steve Leung Design Group is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Steve Leung Design Group boasts net cash, so it's fair to say it does not have a heavy debt load!
In fact Steve Leung Design Group's saving grace is its low debt levels, because its EBIT has tanked 44% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Steve Leung Design Group 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.