Is Shirble Department Store Holdings (China) Limited’s (HKG:312) Balance Sheet A Threat To Its Future?
The direct benefit for Shirble Department Store Holdings (China) Limited (HKG:312), which sports a zero-debt capital structure, to include debt in its capital structure is the reduced cost of capital. However, the trade-off is 312 will have to adhere to stricter debt covenants and have less financial flexibility. While 312 has no debt on its balance sheet, it doesn’t necessarily mean it exhibits financial strength. I recommend you look at the following hurdles to assess 312’s financial health.
View our latest analysis for Shirble Department Store Holdings (China)
Does 312’s growth rate justify its decision for financial flexibility over lower cost of capital?
There are well-known benefits of including debt in capital structure, primarily a lower cost of capital. Though, the trade-offs are that lenders require stricter capital management requirements, in addition to having a higher claim on company assets relative to shareholders. The lack of debt on 312’s balance sheet may be because it does not have access to cheap capital, or it may believe this trade-off is not worth it. Choosing financial flexibility over capital returns make sense if 312 is a high-growth company. Opposite to the high growth we were expecting, 312’s negative revenue growth of -8.1% hardly justifies opting for zero-debt. If the decline sustains, it may find it hard to raise debt at an acceptable cost.
Can 312 pay its short-term liabilities?
Since Shirble Department Store Holdings (China) doesn’t have any debt on its balance sheet, it doesn’t have any solvency issues, which is a term used to describe the company’s ability to meet its long-term obligations. But another important aspect of financial health is liquidity: the company’s ability to meet short-term obligations, including payments to suppliers and employees. At the current liabilities level of CN¥696.5m liabilities, it appears that the company has maintained a safe level of current assets to meet its obligations, with the current ratio last standing at 1.11x. For Multiline Retail companies, this ratio is within a sensible range as there’s enough of a cash buffer without holding too capital in low return investments.
Next Steps:
312 is a fast-growing firm, which supports having have zero-debt and financial freedom to continue to ramp up growth. Since there is also no concerns around 312’s liquidity needs, this may be its optimal capital structure for the time being. Moving forward, its financial position may be different. This is only a rough assessment of financial health, and I’m sure 312 has company-specific issues impacting its capital structure decisions. You should continue to research Shirble Department Store Holdings (China) to get a better picture of the stock by looking at:
Future Outlook: What are well-informed industry analysts predicting for 312’s future growth? Take a look at our free research report of analyst consensus for 312’s outlook.
Historical Performance: What has 312’s returns been like over the past? Go into more detail in the past track record analysis and take a look at the free visual representations of our analysis for more clarity.
Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at editorial-team@simplywallst.com.
