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 New World Department Store China Limited (HKG:825) does use debt in its business. But the more important question is: how much risk is that debt creating?
What Risk Does Debt Bring?
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 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. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for New World Department Store China
What Is New World Department Store China's Debt?
The image below, which you can click on for greater detail, shows that at June 2022 New World Department Store China had debt of HK$1.49b, up from HK$1.41b in one year. However, because it has a cash reserve of HK$1.08b, its net debt is less, at about HK$410.1m.
![debt-equity-history-analysis](https://usnewsfile.futunn.com/pic/0-17683282-0-43052874244f93b65024dad77b2d9e2a.png/big)
SEHK:825 Debt to Equity History December 12th 2022
How Healthy Is New World Department Store China's Balance Sheet?
According to the last reported balance sheet, New World Department Store China had liabilities of HK$4.29b due within 12 months, and liabilities of HK$4.22b due beyond 12 months. Offsetting this, it had HK$1.08b in cash and HK$104.5m in receivables that were due within 12 months. So it has liabilities totalling HK$7.33b more than its cash and near-term receivables, combined.
The deficiency here weighs heavily on the HK$1.55b 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'd watch its balance sheet closely, without a doubt. At the end of the day, New World Department Store China would probably need a major re-capitalization if its creditors were to demand repayment.
In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.
Even though New World Department Store China's debt is only 1.9, its interest cover is really very low at 0.52. This does suggest the company is paying fairly high interest rates. Either way there's no doubt the stock is using meaningful leverage. Shareholders should be aware that New World Department Store China's EBIT was down 64% last year. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is New World Department Store China'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.
Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. Over the last three years, New World Department Store China actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Our View
To be frank both New World Department Store China's EBIT growth rate and its track record of staying on top of its total liabilities make us rather uncomfortable with its debt levels. But at least it's pretty decent at converting EBIT to free cash flow; that's encouraging. We're quite clear that we consider New World Department Store China to be really rather risky, as a result of its balance sheet health. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for New World Department Store China (1 shouldn't be ignored!) that you should be aware of before investing here.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
由伯克希尔哈撒韦的Li·芒格支持的外部基金经理Lu直言不讳地说,最大的投资风险不是价格的波动,而是你是否会遭受永久性的资本损失。当我们考虑一家公司的风险有多大时,我们总是喜欢看它对债务的使用,因为债务过重可能导致破产。我们可以看到新世界中国百货有限公司(HKG:825)确实在其业务中使用债务。但更重要的问题是:这笔债务造成了多大的风险?
债务会带来什么风险?
一般来说,只有当一家公司无法轻松偿还债务时,债务才会成为一个真正的问题,无论是通过筹集资金还是用自己的现金流。最终,如果公司不能履行其偿还债务的法定义务,股东可能会一无所有地离开。然而,一种更常见(但仍然昂贵)的情况是,一家公司必须以低廉的股价稀释股东的股份,才能控制债务。然而,通过取代稀释,对于需要资本投资于高回报率增长的企业来说,债务可以成为一个非常好的工具。当我们考虑一家公司的债务用途时,我们首先会把现金和债务放在一起看。
看看我们对新世界百货公司中国的最新分析
新世界百货中国的债务是什么?
下图显示,截至2022年6月,新世界百货公司中国的债务为14.9亿港元,高于一年内的14.1亿港元。然而,由于该公司拥有10.8亿港元的现金储备,其净债务规模较小,约为4.101亿港元。
![debt-equity-history-analysis](https://usnewsfile.futunn.com/pic/0-17683282-0-43052874244f93b65024dad77b2d9e2a.png/big)
联交所:825债转股历史2022年12月12日
新世界百货中国的资产负债表有多健康?
根据最近一次公布的资产负债表,新世界百货公司中国有42.9亿港元的负债在12个月内到期,42.2亿港元的负债在12个月后到期。作为抵消,该公司有10.8亿港元现金和1.045亿港元应收账款在12个月内到期。因此,该公司的负债总额为73.3亿港元,比现金和近期应收账款的总和还要多。
这一不足给这家市值15.5亿港元的公司本身带来了沉重的负担,就像一个孩子在一个装满书籍、运动装备和小号的巨大背包的重压下挣扎一样。因此,毫无疑问,我们会密切关注它的资产负债表。归根结底,如果新世界百货公司的债权人要求偿还债务,新世界百货公司中国可能需要进行一次重大的资本重组。
为了评估一家公司的债务相对于它的收益,我们计算它的净债务除以它的利息、税项、折旧和摊销前收益(EBITDA)和它的利息和税前收益(EBIT)除以它的利息支出(它的利息覆盖)。这样,我们既考虑了债务的绝对量,也考虑了为其支付的利率。
尽管新世界百货中国的债务只有1.9%,但它的利息覆盖率真的很低,只有0.52%。这确实表明,该公司正在支付相当高的利率。无论哪种方式,毫无疑问,该股正在使用有意义的杠杆。股东们应该知道,新世界百货公司中国去年的息税前利润下降了64%。如果这种盈利趋势持续下去,那么偿还债务就像把猫赶上过山车一样容易。毫无疑问,我们从资产负债表中了解到的债务最多。但影响未来资产负债表表现的将是新世界百货公司中国的收入。因此,如果你热衷于了解更多关于它的收益,可能值得查看一下它的长期收益趋势图。
最后,企业需要自由现金流来偿还债务;会计利润只是不能削减这一点。因此,我们显然需要看看息税前利润是否会带来相应的自由现金流。在过去的三年里,新世界百货公司中国产生的自由现金流实际上比息税前利润还多。说到赢得贷款人的好感,没有什么比收到的现金更好的了。
我们的观点
坦率地说,新世界百货公司中国的息税前利润增长率和其保持在总负债水平上的记录都让我们对其债务水平感到相当不安。但至少它在将息税前利润转化为自由现金流方面相当不错;这是令人鼓舞的。我们非常清楚,由于新世界百货资产负债表的健康状况,我们认为新世界百货中国的风险确实相当大。出于这个原因,我们对该股相当谨慎,我们认为股东应该密切关注其流动性。在分析债务水平时,资产负债表显然是一个起点。然而,并非所有投资风险都存在于资产负债表中--远非如此。例如,我们发现新世界百货中国的2个警示标志(1不应该被忽视!)在这里投资之前你应该意识到这一点。
如果你有兴趣投资于可以在没有债务负担的情况下增长利润的企业,那么看看这个免费资产负债表上有净现金的成长型企业名单。
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本文由Simply Wall St.撰写,具有概括性。我们仅使用不偏不倚的方法提供基于历史数据和分析师预测的评论,我们的文章并不打算作为财务建议。它不构成买卖任何股票的建议,也没有考虑你的目标或你的财务状况。我们的目标是为您带来由基本面数据驱动的长期重点分析。请注意,我们的分析可能不会将最新的对价格敏感的公司公告或定性材料考虑在内。Simply Wall St.对上述任何一只股票都没有持仓。