Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Ccoop Group Co., Ltd (SZSE:000564) does use debt in its business. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?
You can click the graphic below for the historical numbers, but it shows that Ccoop Group had CN¥5.25b of debt in September 2023, down from CN¥6.20b, one year before. However, it does have CN¥342.5m in cash offsetting this, leading to net debt of about CN¥4.91b.
How Strong Is Ccoop Group's Balance Sheet?
We can see from the most recent balance sheet that Ccoop Group had liabilities of CN¥4.94b falling due within a year, and liabilities of CN¥11.2b due beyond that. On the other hand, it had cash of CN¥342.5m and CN¥430.1m worth of receivables due within a year. So it has liabilities totalling CN¥15.4b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of CN¥23.6b, so it does suggest shareholders should keep an eye on Ccoop Group's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year Ccoop Group wasn't profitable at an EBIT level, but managed to grow its revenue by 2.6%, to CN¥1.4b. We usually like to see faster growth from unprofitable companies, but each to their own.
Caveat Emptor
Importantly, Ccoop Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥391m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥1.6b into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Ccoop Group you should be aware of.
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.