Is Century Ginwa Retail Holdings (HKG:162) Using Too Much Debt?

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. We can see that Century Ginwa Retail Holdings Limited (HKG:162) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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.

See our latest analysis for Century Ginwa Retail Holdings

How Much Debt Does Century Ginwa Retail Holdings Carry?

As you can see below, at the end of December 2023, Century Ginwa Retail Holdings had CN¥4.72b of debt, up from CN¥4.07b a year ago. Click the image for more detail. 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¥2.26b due within a year, and liabilities of CN¥4.48b falling due after that. Offsetting this, it had CN¥61.3m in cash and CN¥166.4m in receivables that were due within 12 months. So it has liabilities totalling CN¥6.52b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥135.8m 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, Century Ginwa Retail Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Century Ginwa Retail Holdings had a loss before interest and tax, and actually shrunk its revenue by 2.6%, to CN¥366m. 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. Indeed, it lost a very considerable CN¥197m 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. 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¥453m 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. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Century Ginwa Retail Holdings you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.