Is Best Mart 360 Holdings (HKG:2360) Using Too Much Debt?

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. We can see that Best Mart 360 Holdings Limited (HKG:2360) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Best Mart 360 Holdings

How Much Debt Does Best Mart 360 Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Best Mart 360 Holdings had HK$81.1m of debt in September 2022, down from HK$98.9m, one year before. However, its balance sheet shows it holds HK$194.5m in cash, so it actually has HK$113.4m net cash.

A Look At Best Mart 360 Holdings' Liabilities

The latest balance sheet data shows that Best Mart 360 Holdings had liabilities of HK$341.9m due within a year, and liabilities of HK$100.7m falling due after that. Offsetting this, it had HK$194.5m in cash and HK$11.8m in receivables that were due within 12 months. So its liabilities total HK$236.3m more than the combination of its cash and short-term receivables.

Given Best Mart 360 Holdings has a market capitalization of HK$2.49b, 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. While it does have liabilities worth noting, Best Mart 360 Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Best Mart 360 Holdings grew its EBIT by 144% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. When analysing debt levels, the balance sheet is the obvious place to start. But it is Best Mart 360 Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Best Mart 360 Holdings's liabilities, but we can be reassured by the fact it has has net cash of HK$113.4m. And it impressed us with free cash flow of HK$396m, being 262% of its EBIT. So we don't think Best Mart 360 Holdings's use of debt is 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 1 warning sign for Best Mart 360 Holdings you should know about.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.