Luxxu Group (HKG:1327) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Luxxu Group Limited (HKG:1327) does use debt in its business. But the more important question is: how much risk is that debt creating?

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Luxxu Group Carry?

You can click the graphic below for the historical numbers, but it shows that Luxxu Group had CN¥21.4m of debt in June 2025, down from CN¥27.8m, one year before. However, because it has a cash reserve of CN¥20.4m, its net debt is less, at about CN¥988.0k.

A Look At Luxxu Group's Liabilities

According to the last reported balance sheet, Luxxu Group had liabilities of CN¥3.90m due within 12 months, and liabilities of CN¥24.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥20.4m as well as receivables valued at CN¥11.7m due within 12 months. So it actually has CN¥3.50m more liquid assets than total liabilities.

This surplus suggests that Luxxu Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Carrying virtually no net debt, Luxxu Group has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Luxxu 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.

See our latest analysis for Luxxu Group

Over 12 months, Luxxu Group reported revenue of CN¥29m, which is a gain of 8.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Luxxu Group had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥51m. Looking on the brighter side, the business has adequate liquid assets, which give it time to grow and develop before its debt becomes a near-term issue. But we'd be more likely to spend time trying to understand the stock if the company made a profit. This one is a bit too risky for our liking. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Luxxu Group is showing 3 warning signs in our investment analysis , and 1 of those 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.