We Think Best Mart 360 Holdings (HKG:2360) Can Manage Its Debt With Ease

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Best Mart 360 Holdings Limited (HKG:2360) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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 Best Mart 360 Holdings had HK$83.0m of debt in March 2022, down from HK$107.5m, one year before. But it also has HK$160.5m in cash to offset that, meaning it has HK$77.5m net cash.

A Look At Best Mart 360 Holdings' Liabilities

We can see from the most recent balance sheet that Best Mart 360 Holdings had liabilities of HK$349.4m falling due within a year, and liabilities of HK$112.7m due beyond that. Offsetting these obligations, it had cash of HK$160.5m as well as receivables valued at HK$7.24m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$294.4m.

Of course, Best Mart 360 Holdings has a market capitalization of HK$1.85b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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!

Even more impressive was the fact that Best Mart 360 Holdings grew its EBIT by 104% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. There's no doubt that we learn most about debt from the balance sheet. 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.

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

While Best Mart 360 Holdings does have more liabilities than liquid assets, it also has net cash of HK$77.5m. And it impressed us with free cash flow of HK$280m, being 257% of its EBIT. So is Best Mart 360 Holdings's debt a risk? It doesn't seem so to us. 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 - Best Mart 360 Holdings has 1 warning sign we think you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.