Is Shirble Department Store Holdings (China) (HKG:312) A Risky Investment?

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.' 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 Shirble Department Store Holdings (China) Limited (HKG:312) does use debt in its business. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt 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 December 2021, Shirble Department Store Holdings (China) had CN¥656.9m of debt, up from CN¥372.1m a year ago. Click the image for more detail. However, it does have CN¥159.2m in cash offsetting this, leading to net debt of about CN¥497.6m.

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¥635.3m due within a year, and liabilities of CN¥1.66b falling due after that. Offsetting these obligations, it had cash of CN¥159.2m as well as receivables valued at CN¥230.1m due within 12 months. So it has liabilities totalling CN¥1.90b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥208.0m 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, Shirble Department Store Holdings (China) 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 it is Shirble Department Store Holdings (China)'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.

Over 12 months, Shirble Department Store Holdings (China) made a loss at the EBIT level, and saw its revenue drop to CN¥88m, which is a fall of 83%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shirble Department Store Holdings (China)'s revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable CN¥153m at the EBIT level. 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. 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¥438m in the last year. So we think buying this stock is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 3 warning signs for Shirble Department Store Holdings (China) you should be aware of, and 1 of them is potentially serious.

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.