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. We note that Century Ginwa Retail Holdings Limited (HKG:162) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.
What Is Century Ginwa Retail Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of December 2024 Century Ginwa Retail Holdings had CN¥5.08b of debt, an increase on CN¥4.72b, over one year. On the flip side, it has CN¥106.6m in cash leading to net debt of about CN¥4.97b.
A Look At Century Ginwa Retail Holdings' Liabilities
We can see from the most recent balance sheet that Century Ginwa Retail Holdings had liabilities of CN¥1.79b falling due within a year, and liabilities of CN¥5.29b due beyond that. Offsetting this, it had CN¥106.6m in cash and CN¥51.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.93b.
This deficit casts a shadow over the CN¥61.2m 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, Century Ginwa Retail Holdings would probably need a major re-capitalization if its creditors were to demand repayment. There's no doubt that we learn most about debt from the balance sheet. But it is Century Ginwa Retail Holdings's earnings that will influence how the balance sheet holds up in the future. 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.
See our latest analysis for Century Ginwa Retail Holdings
In the last year Century Ginwa Retail Holdings's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.
Caveat Emptor
Importantly, Century Ginwa Retail Holdings had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥195m 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 CN¥538m 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. We've identified 2 warning signs with Century Ginwa Retail Holdings (at least 1 which is potentially serious) , and understanding them should be part of your investment process.
When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.
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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.