Is Xinjiang La Chapelle Fashion (HKG:6116) Weighed On By Its Debt Load?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that Xinjiang La Chapelle Fashion Co., Ltd. (HKG:6116) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Xinjiang La Chapelle Fashion

What Is Xinjiang La Chapelle Fashion's Net Debt?

The image below, which you can click on for greater detail, shows that Xinjiang La Chapelle Fashion had debt of CN¥1.72b at the end of September 2020, a reduction from CN¥1.80b over a year. However, it also had CN¥256.0m in cash, and so its net debt is CN¥1.46b.

A Look At Xinjiang La Chapelle Fashion's Liabilities

The latest balance sheet data shows that Xinjiang La Chapelle Fashion had liabilities of CN¥4.15b due within a year, and liabilities of CN¥261.0m falling due after that. Offsetting this, it had CN¥256.0m in cash and CN¥434.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥3.72b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥123.9m 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. After all, Xinjiang La Chapelle Fashion would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Xinjiang La Chapelle Fashion 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 Xinjiang La Chapelle Fashion had a loss before interest and tax, and actually shrunk its revenue by 62%, to CN¥3.7b. To be frank that doesn't bode well.

Caveat Emptor

Not only did Xinjiang La Chapelle Fashion's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥1.9b. 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. 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¥2.1b 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. However, not all investment risk resides within the balance sheet - far from it. Be aware that Xinjiang La Chapelle Fashion is showing 3 warning signs in our investment analysis , and 1 of those is significant...

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

If you decide to trade Xinjiang La Chapelle Fashion, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.