Shoppers Stop (NSE:SHOPERSTOP) Is Making Moderate Use Of Debt

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 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. As with many other companies Shoppers Stop Limited (NSE:SHOPERSTOP) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Shoppers Stop

What Is Shoppers Stop's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 Shoppers Stop had ₹2.16b of debt, an increase on ₹1.86b, over one year. However, because it has a cash reserve of ₹1.79b, its net debt is less, at about ₹371.4m.

How Strong Is Shoppers Stop's Balance Sheet?

The latest balance sheet data shows that Shoppers Stop had liabilities of ₹19.4b due within a year, and liabilities of ₹17.7b falling due after that. On the other hand, it had cash of ₹1.79b and ₹444.6m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₹34.8b.

This deficit is considerable relative to its market capitalization of ₹53.2b, so it does suggest shareholders should keep an eye on Shoppers Stop's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Carrying virtually no net debt, Shoppers Stop has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Shoppers Stop's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Shoppers Stop reported revenue of ₹25b, which is a gain of 44%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Shoppers Stop still had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost ₹856m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of ₹470m. In the meantime, we consider the stock very 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. We've identified 2 warning signs with Shoppers Stop , and understanding them should be part of your investment process.

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.

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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.