Grand Ocean Retail Group (TWSE:5907) Has Debt But No Earnings; Should You Worry?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Grand Ocean Retail Group Ltd. (TWSE:5907) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Grand Ocean Retail Group

How Much Debt Does Grand Ocean Retail Group Carry?

The image below, which you can click on for greater detail, shows that at June 2024 Grand Ocean Retail Group had debt of NT$4.18b, up from NT$3.78b in one year. On the flip side, it has NT$1.18b in cash leading to net debt of about NT$3.00b.

How Strong Is Grand Ocean Retail Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Grand Ocean Retail Group had liabilities of NT$6.23b due within 12 months and liabilities of NT$13.0b due beyond that. On the other hand, it had cash of NT$1.18b and -NT$146.6m worth of receivables due within a year. So it has liabilities totalling NT$18.2b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the NT$2.21b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Grand Ocean Retail Group would probably need a major re-capitalization if its creditors were to demand repayment. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Grand Ocean Retail Group 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 Grand Ocean Retail Group had a loss before interest and tax, and actually shrunk its revenue by 8.2%, to NT$3.5b. We would much prefer see growth.

Caveat Emptor

Importantly, Grand Ocean Retail Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost NT$166m 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 NT$1.8b 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. Case in point: We've spotted 4 warning signs for Grand Ocean Retail Group you should be aware of, and 3 of them are concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.