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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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Century Ginwa Retail Holdings Limited (HKG:162) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Century Ginwa Retail Holdings
What Is Century Ginwa Retail Holdings's Net Debt?
As you can see below, Century Ginwa Retail Holdings had CN¥2.36b of debt, at March 2019, which is about the same the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥544.7m, its net debt is less, at about CN¥1.82b.
A Look At Century Ginwa Retail Holdings's Liabilities
Zooming in on the latest balance sheet data, we can see that Century Ginwa Retail Holdings had liabilities of CN¥2.04b due within 12 months and liabilities of CN¥2.13b due beyond that. Offsetting this, it had CN¥544.7m in cash and CN¥444.3m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.18b.
The deficiency here weighs heavily on the CN¥523.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Century Ginwa Retail Holdings would likely require a major re-capitalisation if it had to pay its creditors today.
We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.