Shanshan Brand Management (HKG:1749) Has Debt But No Earnings; Should You Worry?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Shanshan Brand Management Co., Ltd. (HKG:1749) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Shanshan Brand Management

What Is Shanshan Brand Management's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Shanshan Brand Management had CN¥273.2m of debt in June 2020, down from CN¥285.0m, one year before. However, because it has a cash reserve of CN¥61.6m, its net debt is less, at about CN¥211.6m.

How Strong Is Shanshan Brand Management's Balance Sheet?

The latest balance sheet data shows that Shanshan Brand Management had liabilities of CN¥683.6m due within a year, and liabilities of CN¥32.7m falling due after that. On the other hand, it had cash of CN¥61.6m and CN¥124.7m worth of receivables due within a year. So it has liabilities totalling CN¥530.1m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥57.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Shanshan Brand Management would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Shanshan Brand Management'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.

Over 12 months, Shanshan Brand Management made a loss at the EBIT level, and saw its revenue drop to CN¥827m, which is a fall of 22%. To be frank that doesn't bode well.

Caveat Emptor

While Shanshan Brand Management'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 a very considerable CN¥103m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the reality is that it is low on liquid assets relative to liabilities, and it burned through CN¥21m in the last year. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Shanshan Brand Management is showing 4 warning signs in our investment analysis , and 3 of those can'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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