Is Shoppers Stop (NSE: SHOPERSTOP) using too much debt?

Berkshire Hathaway’s Charlie Munger-backed external fund manager Li Lu is quick to say this when he says “The biggest risk in investing is not price volatility, but if you will suffer a loss. permanent capital “. When we think about how risky a business is, we always like to look at its use of debt because debt overload can lead to bankruptcy. We notice that Shoppers Stop Limited (NSE: SHOPERSTOP) has debt on its balance sheet. But the most important question is: what risk does this debt create?

When is Debt a Problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) event is when a company has to issue stock at bargain prices, constantly diluting shareholders, just to strengthen its balance sheet. Of course, debt can be an important tool in businesses, especially capital intensive businesses. The first step in examining a business’s debt levels is to consider its cash flow and debt together.

Check out our latest review for Shoppers Stop

What is Shoppers Stop Net Debt?

You can click on the chart below for historical figures, but it shows that Shoppers Stop had 2.36 billion yen in debt in September 2021, down from 2.94 billion yen a year earlier. On the other hand, it has 1.53 billion yen in cash, resulting in net debt of around 831.3 million yen.

NSEI: SHOPERSTOP History of debt to equity December 13, 2021

How strong is Shoppers Stop’s balance sheet?

The latest balance sheet data shows Shoppers Stop had 18.2 billion yen in liabilities due within one year, and 16.6 billion yen liabilities due after that. On the other hand, he had 1.53 billion yen in cash and 381.4 million yen in receivables due within one year. Thus, its liabilities exceed the sum of its cash and its (short-term) receivables by 32.9 billion euros.

This is a mountain of leverage compared to its market cap of 40.0 billion yen. If its lenders asked it to consolidate the balance sheet, shareholders would likely face severe dilution. There is no doubt that we learn the most about debt from the balance sheet. But ultimately, the company’s future profitability will decide whether Shoppers Stop can strengthen its balance sheet over time. So if you are focused on the future you can check this out free report showing analysts’ earnings forecasts.

Over the past year, Shoppers Stop has not been profitable on EBIT level, but has managed to increase its revenue by 6.2%, to 22 billion yen. This growth rate is a bit slow for our tastes, but it takes all types to make a world.

Emptor Warning

It is important to note that Shoppers Stop has recorded a loss of profit before interest and taxes (EBIT) over the past year. To be precise, the EBIT loss amounted to 1.7 billion yen. Considering that besides the liabilities mentioned above, we are not convinced that the company should use so much debt. We therefore believe that its record is a bit strained, but not irreparable. We’d be better off if he turned his last year loss of 1.6 billion yen into a profit. So we think this title is quite risky. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist off the balance sheet. We have identified 2 warning signs with Shoppers Stop and understanding them should be part of your investing process.

At the end of the day, sometimes it’s easier to focus on businesses that don’t even need to go into debt. Readers can access a list of growth stocks with zero net debt 100% free, at present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only 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 into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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