Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Yonghui Superstores Co., Ltd. (SHSE:601933) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
View our latest analysis for Yonghui Superstores
What Is Yonghui Superstores's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Yonghui Superstores had CN¥4.78b of debt in June 2023, down from CN¥8.86b, one year before. But on the other hand it also has CN¥5.26b in cash, leading to a CN¥478.9m net cash position.
How Healthy Is Yonghui Superstores' Balance Sheet?
We can see from the most recent balance sheet that Yonghui Superstores had liabilities of CN¥23.0b falling due within a year, and liabilities of CN¥22.7b due beyond that. On the other hand, it had cash of CN¥5.26b and CN¥3.13b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥37.3b.
Given this deficit is actually higher than the company's market capitalization of CN¥27.8b, we think shareholders really should watch Yonghui Superstores's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. Yonghui Superstores boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Yonghui Superstores's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
Over 12 months, Yonghui Superstores made a loss at the EBIT level, and saw its revenue drop to CN¥83b, which is a fall of 10%. We would much prefer see growth.
So How Risky Is Yonghui Superstores?
Although Yonghui Superstores had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥3.1b. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. For riskier companies like Yonghui Superstores I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.