David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Parkson Retail Asia Limited (SGX:O9E) makes use of debt. But the more important question is: how much risk is that debt creating?

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. 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, 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Parkson Retail Asia

How Much Debt Does Parkson Retail Asia Carry?

The image below, which you can click on for greater detail, shows that at June 2019 Parkson Retail Asia had debt of S$15.8m, up from S$3.88m in one year. However, it does have S$53.1m in cash offsetting this, leading to net cash of S$37.3m.

How Strong Is Parkson Retail Asia's Balance Sheet?

We can see from the most recent balance sheet that Parkson Retail Asia had liabilities of S$196.6m falling due within a year, and liabilities of S$46.0m due beyond that. Offsetting these obligations, it had cash of S$53.1m as well as receivables valued at S$24.9m due within 12 months. So it has liabilities totalling S$164.6m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$15.5m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Parkson Retail Asia would probably need a major re-capitalization if its creditors were to demand repayment. Given that Parkson Retail Asia 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. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Parkson Retail Asia 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.