Is Century Ginwa Retail Holdings (HKG:162) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Century Ginwa Retail Holdings Limited (HKG:162) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Century Ginwa Retail Holdings

What Is Century Ginwa Retail Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Century Ginwa Retail Holdings had CN¥3.61b of debt, an increase on CN¥3.12b, over one year. And it doesn't have much cash, so its net debt is about the same.

A Look At Century Ginwa Retail Holdings' Liabilities

The latest balance sheet data shows that Century Ginwa Retail Holdings had liabilities of CN¥2.79b due within a year, and liabilities of CN¥2.61b falling due after that. Offsetting these obligations, it had cash of CN¥36.5m as well as receivables valued at CN¥59.6m due within 12 months. So its liabilities total CN¥5.31b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥273.1m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. 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 you can't view debt in total isolation; since Century Ginwa Retail Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Century Ginwa Retail Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to CN¥505m. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Century Ginwa Retail Holdings produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥117m. 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 lost CN¥368m in the last year. So we think buying this stock is risky. 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. For instance, we've identified 3 warning signs for Century Ginwa Retail Holdings (1 is concerning) you should be aware of.

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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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.