Health Check: How Prudently Does Zhongmin Baihui Retail Group (SGX:5SR) Use Debt?

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.' 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 note that Zhongmin Baihui Retail Group Ltd. (SGX:5SR) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Zhongmin Baihui Retail Group

What Is Zhongmin Baihui Retail Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 Zhongmin Baihui Retail Group had CN¥133.2m of debt, an increase on CN¥64.2m, over one year. But it also has CN¥158.7m in cash to offset that, meaning it has CN¥25.5m net cash.

How Healthy Is Zhongmin Baihui Retail Group's Balance Sheet?

According to the last reported balance sheet, Zhongmin Baihui Retail Group had liabilities of CN¥571.7m due within 12 months, and liabilities of CN¥388.3m due beyond 12 months. On the other hand, it had cash of CN¥158.7m and CN¥171.4m worth of receivables due within a year. So it has liabilities totalling CN¥629.7m more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥467.4m, we think shareholders really should watch Zhongmin Baihui Retail Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Zhongmin Baihui Retail Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Zhongmin Baihui Retail Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Zhongmin Baihui Retail Group had a loss before interest and tax, and actually shrunk its revenue by 13%, to CN¥1.1b. We would much prefer see growth.

So How Risky Is Zhongmin Baihui Retail Group?

Although Zhongmin Baihui Retail Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥33m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Zhongmin Baihui Retail Group (2 are significant) you should be aware of.

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. 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.