Is Crocodile Garments (HKG:122) A Risky Investment?

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.' 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 note that Crocodile Garments Limited (HKG:122) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Crocodile Garments

What Is Crocodile Garments's Net Debt?

The image below, which you can click on for greater detail, shows that Crocodile Garments had debt of HK$701.5m at the end of July 2024, a reduction from HK$754.0m over a year. However, it does have HK$268.6m in cash offsetting this, leading to net debt of about HK$432.9m.

How Strong Is Crocodile Garments' Balance Sheet?

According to the last reported balance sheet, Crocodile Garments had liabilities of HK$215.2m due within 12 months, and liabilities of HK$572.1m due beyond 12 months. Offsetting this, it had HK$268.6m in cash and HK$6.95m in receivables that were due within 12 months. So its liabilities total HK$511.7m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$139.3m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. At the end of the day, Crocodile Garments would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Crocodile Garments's earnings that will influence how the balance sheet holds up in the future. 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 Crocodile Garments wasn't profitable at an EBIT level, but managed to grow its revenue by 9.7%, to HK$95m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Crocodile Garments produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable HK$23m at the EBIT level. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it lost HK$34m in just last twelve months, and it doesn't have much by way of liquid assets. So while it's not wise to assume the company will fail, we do think it's 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Crocodile Garments you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.