Health Check: How Prudently Does BestoreLtd (SHSE:603719) Use 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. We can see that Bestore Co.,Ltd (SHSE:603719) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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 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.

See our latest analysis for BestoreLtd

What Is BestoreLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that BestoreLtd had CN¥125.0m of debt in September 2024, down from CN¥349.2m, one year before. However, it does have CN¥1.41b in cash offsetting this, leading to net cash of CN¥1.28b.

How Healthy Is BestoreLtd's Balance Sheet?

According to the last reported balance sheet, BestoreLtd had liabilities of CN¥1.79b due within 12 months, and liabilities of CN¥226.9m due beyond 12 months. On the other hand, it had cash of CN¥1.41b and CN¥423.1m worth of receivables due within a year. So it has liabilities totalling CN¥190.2m more than its cash and near-term receivables, combined.

Given BestoreLtd has a market capitalization of CN¥5.44b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, BestoreLtd boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if BestoreLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, BestoreLtd made a loss at the EBIT level, and saw its revenue drop to CN¥7.5b, which is a fall of 11%. We would much prefer see growth.

So How Risky Is BestoreLtd?

While BestoreLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥8.4m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. Be aware that BestoreLtd is showing 4 warning signs in our investment analysis , and 1 of those is potentially serious...

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.