The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Shanghai Yimin Commercial Group Co., Ltd. (SHSE:600824) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai Yimin Commercial Group

What Is Shanghai Yimin Commercial Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Shanghai Yimin Commercial Group had CN¥150.1m of debt in March 2023, down from CN¥370.5m, one year before. But it also has CN¥1.11b in cash to offset that, meaning it has CN¥961.7m net cash.

How Healthy Is Shanghai Yimin Commercial Group's Balance Sheet?

According to the last reported balance sheet, Shanghai Yimin Commercial Group had liabilities of CN¥385.9m due within 12 months, and liabilities of CN¥206.6m due beyond 12 months. Offsetting this, it had CN¥1.11b in cash and CN¥108.3m in receivables that were due within 12 months. So it can boast CN¥627.6m more liquid assets than total liabilities.

This surplus suggests that Shanghai Yimin Commercial Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Shanghai Yimin Commercial Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Shanghai Yimin Commercial 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, Shanghai Yimin Commercial Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Shanghai Yimin Commercial Group?

Although Shanghai Yimin Commercial Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥74m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with Shanghai Yimin Commercial Group , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.