Is Better Life Commercial Chain ShareLtd (SZSE:002251) Using Too Much Debt?

Warren Buffett famously said, '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. Importantly, Better Life Commercial Chain Share Co.,Ltd (SZSE:002251) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Better Life Commercial Chain ShareLtd

What Is Better Life Commercial Chain ShareLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Better Life Commercial Chain ShareLtd had CN¥8.43b of debt in September 2024, down from CN¥10.3b, one year before. However, it does have CN¥1.29b in cash offsetting this, leading to net debt of about CN¥7.14b.

A Look At Better Life Commercial Chain ShareLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Better Life Commercial Chain ShareLtd had liabilities of CN¥4.51b due within 12 months and liabilities of CN¥10.1b due beyond that. Offsetting this, it had CN¥1.29b in cash and CN¥161.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥13.1b.

Given this deficit is actually higher than the company's market capitalization of CN¥12.0b, we think shareholders really should watch Better Life Commercial Chain ShareLtd'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. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Better Life Commercial Chain ShareLtd 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, Better Life Commercial Chain ShareLtd reported revenue of CN¥3.2b, which is a gain of 3.3%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Better Life Commercial Chain ShareLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥448m 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. Not least because it had negative free cash flow of CN¥1.1b over the last twelve months. So suffice it to say we consider the stock to be risky. 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 3 warning signs for Better Life Commercial Chain ShareLtd (of which 2 don't sit too well with us!) 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.