We Think Beijing Hualian Department Store (SZSE:000882) Can Stay On Top Of Its Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Beijing Hualian Department Store Co., Ltd (SZSE:000882) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for Beijing Hualian Department Store

What Is Beijing Hualian Department Store's Debt?

As you can see below, at the end of June 2024, Beijing Hualian Department Store had CN¥1.22b of debt, up from CN¥867.9m a year ago. Click the image for more detail. However, it does have CN¥1.95b in cash offsetting this, leading to net cash of CN¥735.1m.

How Strong Is Beijing Hualian Department Store's Balance Sheet?

According to the last reported balance sheet, Beijing Hualian Department Store had liabilities of CN¥2.00b due within 12 months, and liabilities of CN¥3.01b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.95b as well as receivables valued at CN¥83.1m due within 12 months. So its liabilities total CN¥2.98b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥4.82b, so it does suggest shareholders should keep an eye on Beijing Hualian Department Store's 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, Beijing Hualian Department Store also has more cash than debt, so we're pretty confident it can manage its debt safely.

One way Beijing Hualian Department Store could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 17%, as it did over the last year. When analysing debt levels, the balance sheet is the obvious place to start. But it is Beijing Hualian Department Store's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Beijing Hualian Department Store has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Beijing Hualian Department Store actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Beijing Hualian Department Store's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥735.1m. And it impressed us with free cash flow of CN¥489m, being 359% of its EBIT. So we don't have any problem with Beijing Hualian Department Store's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Beijing Hualian Department Store that you should be aware of before investing here.

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.