Is Yonghui Superstores (SHSE:601933) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 note that Yonghui Superstores Co., Ltd. (SHSE:601933) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Yonghui Superstores

What Is Yonghui Superstores's Debt?

As you can see below, Yonghui Superstores had CN¥7.12b of debt at March 2024, down from CN¥8.98b a year prior. But on the other hand it also has CN¥7.59b in cash, leading to a CN¥469.5m 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¥22.5b falling due within a year, and liabilities of CN¥20.7b due beyond that. Offsetting this, it had CN¥7.59b in cash and CN¥1.15b in receivables that were due within 12 months. So it has liabilities totalling CN¥34.5b more than its cash and near-term receivables, combined.

The deficiency here weighs heavily on the CN¥19.9b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Yonghui Superstores would likely require a major re-capitalisation if it had to pay its creditors today. 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. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

In the last year Yonghui Superstores had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥77b. That's not what we would hope to see.

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¥4.7b. 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. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Yonghui Superstores that you should be aware of before investing here.

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.

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