Is New World Department Store China (HKG:825) Using Too Much Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies New World Department Store China Limited (HKG:825) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for New World Department Store China

How Much Debt Does New World Department Store China Carry?

As you can see below, New World Department Store China had HK$1.41b of debt at June 2023, down from HK$1.49b a year prior. However, because it has a cash reserve of HK$831.5m, its net debt is less, at about HK$581.0m.

How Healthy Is New World Department Store China's Balance Sheet?

The latest balance sheet data shows that New World Department Store China had liabilities of HK$4.02b due within a year, and liabilities of HK$3.40b falling due after that. Offsetting this, it had HK$831.5m in cash and HK$98.3m in receivables that were due within 12 months. So its liabilities total HK$6.49b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$809.3m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, New World Department Store 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 New World Department Store China's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year New World Department Store China had a loss before interest and tax, and actually shrunk its revenue by 7.9%, to HK$1.8b. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months New World Department Store China produced an earnings before interest and tax (EBIT) loss. Indeed, it lost HK$57m at the EBIT level. 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 HK$321m in the last year. So we're not very excited about owning this stock. Its too risky for us. 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. To that end, you should be aware of the 1 warning sign we've spotted with New World Department Store China .

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.