David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Yonghui Superstores Co., Ltd. (SHSE:601933) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Yonghui Superstores

How Much Debt Does Yonghui Superstores Carry?

You can click the graphic below for the historical numbers, but it shows that Yonghui Superstores had CN¥10.7b of debt in March 2022, down from CN¥14.5b, one year before. On the flip side, it has CN¥10.7b in cash leading to net debt of about CN¥73.8m.

A Look At Yonghui Superstores' Liabilities

According to the last reported balance sheet, Yonghui Superstores had liabilities of CN¥28.4b due within 12 months, and liabilities of CN¥27.2b due beyond 12 months. On the other hand, it had cash of CN¥10.7b and CN¥3.33b worth of receivables due within a year. So it has liabilities totalling CN¥41.6b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥33.5b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Yonghui Superstores has a very little net debt but plenty of other liabilities weighing it down. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Yonghui Superstores can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Yonghui Superstores's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Yonghui Superstores produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥1.9b at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. It's fair to say the loss of CN¥3.5b didn't encourage us either; we'd like to see a profit. And until that time we think this is a risky stock. 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 Yonghui Superstores you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.