Health Check: How Prudently Does Century Ginwa Retail Holdings (HKG:162) Use Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Century Ginwa Retail Holdings Limited (HKG:162) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Century Ginwa Retail Holdings

How Much Debt Does Century Ginwa Retail Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Century Ginwa Retail Holdings had CN¥4.07b of debt, an increase on CN¥3.61b, over one year. 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¥4.44b due within a year, and liabilities of CN¥1.60b falling due after that. Offsetting this, it had CN¥19.5m in cash and CN¥122.0m in receivables that were due within 12 months. So its liabilities total CN¥5.90b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥112.8m company, like a colossus towering over mere mortals. 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. 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 Century Ginwa Retail Holdings 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.

Over 12 months, Century Ginwa Retail Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥376m, which is a fall of 24%. To be frank that doesn't bode well.

Caveat Emptor

While Century Ginwa Retail Holdings'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¥181m at the EBIT level. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Like every long-shot we're sure it has a glossy presentation outlining its blue-sky potential. But the reality is that it is low on liquid assets relative to liabilities, and it lost CN¥362m in the last year. So we're not very excited about owning this stock. Its too risky for us. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 3 warning signs with Century Ginwa Retail Holdings (at least 1 which is concerning) , and understanding them should be part of your investment process.

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.