Does Century Ginwa Retail Holdings (HKG:162) Have A Healthy Balance Sheet?

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.' 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. Importantly, Century Ginwa Retail Holdings Limited (HKG:162) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Century Ginwa Retail Holdings

What Is Century Ginwa Retail Holdings's Net Debt?

The chart below, which you can click on for greater detail, shows that Century Ginwa Retail Holdings had CN¥4.70b in debt in June 2024; about the same as the year before. And it doesn't have much cash, so its net debt is about the same.

How Strong Is Century Ginwa Retail Holdings' Balance Sheet?

The latest balance sheet data shows that Century Ginwa Retail Holdings had liabilities of CN¥2.38b due within a year, and liabilities of CN¥4.58b falling due after that. Offsetting these obligations, it had cash of CN¥26.2m as well as receivables valued at CN¥250.7m due within 12 months. So its liabilities total CN¥6.68b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥65.9m 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'd watch its balance sheet closely, without a doubt. After all, Century Ginwa Retail Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Century Ginwa Retail Holdings'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 Century Ginwa Retail Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 19%, to CN¥398m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Century Ginwa Retail Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥174m. 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¥32m in the last year. So is this a high risk stock? We think so, and we'd avoid it. 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. To that end, you should learn about the 3 warning signs we've spotted with Century Ginwa Retail Holdings (including 2 which are a bit concerning) .

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.