Here's Why Shirble Department Store Holdings (China) (HKG:312) Has A Meaningful Debt Burden

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Shirble Department Store Holdings (China) Limited (HKG:312) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shirble Department Store Holdings (China)

What Is Shirble Department Store Holdings (China)'s Debt?

As you can see below, at the end of June 2020, Shirble Department Store Holdings (China) had CN¥421.4m of debt, up from CN¥188.0m a year ago. Click the image for more detail. But on the other hand it also has CN¥489.9m in cash, leading to a CN¥68.5m net cash position.

How Healthy Is Shirble Department Store Holdings (China)'s Balance Sheet?

The latest balance sheet data shows that Shirble Department Store Holdings (China) had liabilities of CN¥778.1m due within a year, and liabilities of CN¥1.50b falling due after that. Offsetting these obligations, it had cash of CN¥489.9m as well as receivables valued at CN¥622.9m due within 12 months. So its liabilities total CN¥1.17b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥1.18b, so it does suggest shareholders should keep an eye on Shirble Department Store Holdings (China)'s use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Shirble Department Store Holdings (China) also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, Shirble Department Store Holdings (China) grew its EBIT by 33% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shirble Department Store Holdings (China) 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Shirble Department Store Holdings (China) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, Shirble Department Store Holdings (China) burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing up

While Shirble Department Store Holdings (China) does have more liabilities than liquid assets, it also has net cash of CN¥68.5m. And it impressed us with its EBIT growth of 33% over the last year. So although we see some areas for improvement, we're not too worried about Shirble Department Store Holdings (China)'s balance sheet. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Shirble Department Store Holdings (China) is showing 3 warning signs in our investment analysis , 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. 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.
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