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.' 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. As with many other companies Ccoop Group Co., Ltd (SZSE:000564) makes use of debt. But the real question is whether this debt is making the company risky.
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. 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. 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.
Check out our latest analysis for Ccoop Group
What Is Ccoop Group's Net Debt?
The image below, which you can click on for greater detail, shows that at March 2023 Ccoop Group had debt of CN¥5.55b, up from CN¥1.16b in one year. On the flip side, it has CN¥170.8m in cash leading to net debt of about CN¥5.38b.
How Healthy Is Ccoop Group's Balance Sheet?
We can see from the most recent balance sheet that Ccoop Group had liabilities of CN¥4.88b falling due within a year, and liabilities of CN¥11.1b due beyond that. Offsetting this, it had CN¥170.8m in cash and CN¥463.5m in receivables that were due within 12 months. So its liabilities total CN¥15.4b more than the combination of its cash and short-term receivables.
This deficit is considerable relative to its market capitalization of CN¥22.8b, so it does suggest shareholders should keep an eye on Ccoop Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ccoop Group 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.
Over 12 months, Ccoop Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.4b, which is a fall of 8.4%. We would much prefer see growth.
Caveat Emptor
Over the last twelve months Ccoop Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥393m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥1.0b into a profit. So to be blunt we do think it is risky. 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 1 warning sign for Ccoop Group that you should be aware of before investing here.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.