Is Shirble Department Store Holdings (China) (HKG:312) Weighed On By Its Debt Load?

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 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 can see that Shirble Department Store Holdings (China) Limited (HKG:312) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Shirble Department Store Holdings (China)

How Much Debt Does Shirble Department Store Holdings (China) Carry?

The image below, which you can click on for greater detail, shows that Shirble Department Store Holdings (China) had debt of CN¥586.1m at the end of December 2022, a reduction from CN¥656.9m over a year. On the flip side, it has CN¥82.2m in cash leading to net debt of about CN¥503.8m.

A Look At Shirble Department Store Holdings (China)'s Liabilities

The latest balance sheet data shows that Shirble Department Store Holdings (China) had liabilities of CN¥797.3m due within a year, and liabilities of CN¥985.9m falling due after that. Offsetting these obligations, it had cash of CN¥82.2m as well as receivables valued at CN¥271.6m due within 12 months. So it has liabilities totalling CN¥1.43b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥192.5m 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 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.

Over 12 months, Shirble Department Store Holdings (China) made a loss at the EBIT level, and saw its revenue drop to CN¥222m, which is a fall of 15%. We would much prefer see growth.

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¥91m 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¥556m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. Be aware that Shirble Department Store Holdings (China) is showing 3 warning signs in our investment analysis , and 2 of those are significant...

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.