These 4 Measures Indicate That BestoreLtd (SHSE:603719) Is Using Debt Reasonably Well

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. Importantly, Bestore Co.,Ltd (SHSE:603719) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for BestoreLtd

What Is BestoreLtd's Net Debt?

The image below, which you can click on for greater detail, shows that BestoreLtd had debt of CN¥65.0m at the end of September 2023, a reduction from CN¥78.3m over a year. However, it does have CN¥1.48b in cash offsetting this, leading to net cash of CN¥1.41b.

A Look At BestoreLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that BestoreLtd had liabilities of CN¥2.10b due within 12 months and liabilities of CN¥506.6m due beyond that. On the other hand, it had cash of CN¥1.48b and CN¥533.0m worth of receivables due within a year. So its liabilities total CN¥598.8m more than the combination of its cash and short-term receivables.

Given BestoreLtd has a market capitalization of CN¥6.61b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, BestoreLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that BestoreLtd has seen its EBIT plunge 14% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BestoreLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, BestoreLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

We could understand if investors are concerned about BestoreLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥1.41b. The cherry on top was that in converted 119% of that EBIT to free cash flow, bringing in CN¥97m. So we don't have any problem with BestoreLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for BestoreLtd that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.