Best Mart 360 Holdings (HKG:2360) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Best Mart 360 Holdings Limited (HKG:2360) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Best Mart 360 Holdings

What Is Best Mart 360 Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Best Mart 360 Holdings had HK$140.0m of debt, an increase on HK$77.5m, over one year. But it also has HK$148.1m in cash to offset that, meaning it has HK$8.05m net cash.

How Healthy Is Best Mart 360 Holdings's Balance Sheet?

According to the last reported balance sheet, Best Mart 360 Holdings had liabilities of HK$355.8m due within 12 months, and liabilities of HK$102.2m due beyond 12 months. Offsetting these obligations, it had cash of HK$148.1m as well as receivables valued at HK$14.3m due within 12 months. So its liabilities total HK$295.7m more than the combination of its cash and short-term receivables.

Of course, Best Mart 360 Holdings has a market capitalization of HK$2.03b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Best Mart 360 Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Importantly, Best Mart 360 Holdings's EBIT fell a jaw-dropping 78% in the last twelve months. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Best Mart 360 Holdings'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Best Mart 360 Holdings 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. Over the last three years, Best Mart 360 Holdings actually produced more free cash flow than EBIT. 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 Best Mart 360 Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$8.05m. The cherry on top was that in converted 128% of that EBIT to free cash flow, bringing in HK$149m. So we don't have any problem with Best Mart 360 Holdings's use of debt. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with Best Mart 360 Holdings , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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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