We Think Shanghai Metersbonwe Fashion and Accessories (SZSE:002269) Has A Fair Chunk Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Shanghai Metersbonwe Fashion and Accessories Co., Ltd. (SZSE:002269) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Shanghai Metersbonwe Fashion and Accessories

What Is Shanghai Metersbonwe Fashion and Accessories's Net Debt?

As you can see below, Shanghai Metersbonwe Fashion and Accessories had CN¥374.8m of debt at September 2024, down from CN¥723.8m a year prior. However, because it has a cash reserve of CN¥106.8m, its net debt is less, at about CN¥268.0m.

How Strong Is Shanghai Metersbonwe Fashion and Accessories' Balance Sheet?

According to the last reported balance sheet, Shanghai Metersbonwe Fashion and Accessories had liabilities of CN¥1.43b due within 12 months, and liabilities of CN¥304.7m due beyond 12 months. Offsetting these obligations, it had cash of CN¥106.8m as well as receivables valued at CN¥298.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.33b.

While this might seem like a lot, it is not so bad since Shanghai Metersbonwe Fashion and Accessories has a market capitalization of CN¥5.90b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Shanghai Metersbonwe Fashion and Accessories 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.

In the last year Shanghai Metersbonwe Fashion and Accessories had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥1.0b. To be frank that doesn't bode well.

Caveat Emptor

While Shanghai Metersbonwe Fashion and Accessories's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥171m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥517m of cash over the last year. So suffice it to say we consider the stock very risky. 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. For example - Shanghai Metersbonwe Fashion and Accessories has 3 warning signs we think you should be aware of.

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.