Is City Chic Collective (ASX:CCX) Weighed On By Its Debt Load?

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.' 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. We can see that City Chic Collective Limited (ASX:CCX) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for City Chic Collective

What Is City Chic Collective's Net Debt?

As you can see below, at the end of January 2023, City Chic Collective had AU$35.5m of debt, up from none a year ago. Click the image for more detail. However, it also had AU$22.1m in cash, and so its net debt is AU$13.4m.

How Strong Is City Chic Collective's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that City Chic Collective had liabilities of AU$106.8m due within 12 months and liabilities of AU$37.6m due beyond that. On the other hand, it had cash of AU$22.1m and AU$8.49m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by AU$113.8m.

Given this deficit is actually higher than the company's market capitalization of AU$89.8m, we think shareholders really should watch City Chic Collective's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine City Chic Collective's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, City Chic Collective reported revenue of AU$355m, which is a gain of 7.0%, 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, City Chic Collective had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable AU$11m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. Not least because it burned through AU$43m in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for City Chic Collective that you should be aware of before investing here.

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.