Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Sun Art Retail Group Limited (HKG:6808) does use debt in its business. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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.
See our latest analysis for Sun Art Retail Group
How Much Debt Does Sun Art Retail Group Carry?
The image below, which you can click on for greater detail, shows that at March 2024 Sun Art Retail Group had debt of CN¥1.75b, up from CN¥673.0m in one year. However, its balance sheet shows it holds CN¥16.4b in cash, so it actually has CN¥14.7b net cash.
A Look At Sun Art Retail Group's Liabilities
We can see from the most recent balance sheet that Sun Art Retail Group had liabilities of CN¥33.5b falling due within a year, and liabilities of CN¥5.42b due beyond that. On the other hand, it had cash of CN¥16.4b and CN¥2.13b worth of receivables due within a year. So its liabilities total CN¥20.4b more than the combination of its cash and short-term receivables.
This deficit casts a shadow over the CN¥13.5b 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, Sun Art Retail Group would probably need a major re-capitalization if its creditors were to demand repayment. Given that Sun Art Retail Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Sun Art Retail Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
In the last year Sun Art Retail Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥73b. That's not what we would hope to see.
So How Risky Is Sun Art Retail Group?
Although Sun Art Retail Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥4.0b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. For riskier companies like Sun Art Retail Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.
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