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Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk'. So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Shirble Department Store Holdings (China) Limited (HKG:312) does carry debt. But should shareholders be worried about its use of debt?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Shirble Department Store Holdings (China)
What Is Shirble Department Store Holdings (China)'s Debt?
The image below, which you can click on for greater detail, shows that at June 2019 Shirble Department Store Holdings (China) had debt of CN¥188.0m, up from none in one year. But on the other hand it also has CN¥497.5m in cash, leading to a CN¥309.6m net cash position.
A Look At Shirble Department Store Holdings (China)'s Liabilities
Zooming in on the latest balance sheet data, we can see that Shirble Department Store Holdings (China) had liabilities of CN¥619.9m due within 12 months and liabilities of CN¥1.56b due beyond that. Offsetting these obligations, it had cash of CN¥497.5m as well as receivables valued at CN¥369.0m due within 12 months. So it has liabilities totalling CN¥1.31b more than its cash and near-term receivables, combined.
While this might seem like a lot, it is not so bad since Shirble Department Store Holdings (China) has a market capitalization of CN¥2.79b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Shirble Department Store Holdings (China) boasts net cash, so it's fair to say it does not have a heavy debt load!
Pleasingly, Shirble Department Store Holdings (China) is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 511% gain in the last twelve months. When analysing debt levels, the balance sheet is the obvious place to start. But it is Shirble Department Store Holdings (China)'s earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.