Does Yonghui Superstores (SHSE:601933) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Yonghui Superstores Co., Ltd. (SHSE:601933) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Yonghui Superstores

What Is Yonghui Superstores's Debt?

The chart below, which you can click on for greater detail, shows that Yonghui Superstores had CN¥7.07b in debt in September 2024; about the same as the year before. But on the other hand it also has CN¥8.44b in cash, leading to a CN¥1.37b net cash position.

A Look At Yonghui Superstores' Liabilities

We can see from the most recent balance sheet that Yonghui Superstores had liabilities of CN¥22.6b falling due within a year, and liabilities of CN¥16.5b due beyond that. Offsetting this, it had CN¥8.44b in cash and CN¥931.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥29.7b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥45.8b, so it does suggest shareholders should keep an eye on Yonghui Superstores' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Yonghui Superstores also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Yonghui Superstores made a loss at the EBIT level, and saw its revenue drop to CN¥71b, which is a fall of 13%. We would much prefer see growth.

So How Risky Is Yonghui Superstores?

While Yonghui Superstores lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥2.4b. 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 revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Yonghui Superstores you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.