These 4 Measures Indicate That Shirble Department Store Holdings (China) (HKG:312) Is Using Debt Extensively

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

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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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

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

As you can see below, Shirble Department Store Holdings (China) had CN¥294.7m of debt at June 2025, down from CN¥554.1m a year prior. However, it also had CN¥27.5m in cash, and so its net debt is CN¥267.2m.

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

According to the last reported balance sheet, Shirble Department Store Holdings (China) had liabilities of CN¥311.6m due within 12 months, and liabilities of CN¥766.6m due beyond 12 months. Offsetting these obligations, it had cash of CN¥27.5m as well as receivables valued at CN¥33.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.02b.

This deficit casts a shadow over the CN¥186.9m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Shirble Department Store Holdings (China) would likely require a major re-capitalisation if it had to pay its creditors today.

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

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While we wouldn't worry about Shirble Department Store Holdings (China)'s net debt to EBITDA ratio of 2.7, we think its super-low interest cover of 1.6 times is a sign of high leverage. So shareholders should probably be aware that interest expenses appear to have really impacted the business lately. On the other hand, Shirble Department Store Holdings (China) grew its EBIT by 26% in the last year. If it can maintain that kind of improvement, its debt load will begin to melt away like glaciers in a warming world. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So the logical step is to look at the proportion of that EBIT that is matched by actual free cash flow. During the last two years, Shirble Department Store Holdings (China) generated free cash flow amounting to a very robust 87% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Our View

While Shirble Department Store Holdings (China)'s level of total liabilities has us nervous. To wit both its conversion of EBIT to free cash flow and EBIT growth rate were encouraging signs. Taking the abovementioned factors together we do think Shirble Department Store Holdings (China)'s debt poses some risks to the business. While that debt can boost returns, we think the company has enough leverage now. 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 2 warning signs for Shirble Department Store Holdings (China) (1 is a bit 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.