Is Zhongmin Baihui Retail Group (SGX:5SR) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Zhongmin Baihui Retail Group Ltd. (SGX:5SR) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

Check out our latest analysis for Zhongmin Baihui Retail Group

How Much Debt Does Zhongmin Baihui Retail Group Carry?

As you can see below, at the end of June 2020, Zhongmin Baihui Retail Group had CN¥40.5m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥241.7m in cash, so it actually has CN¥201.2m 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¥521.8m due within 12 months, and liabilities of CN¥262.8m due beyond 12 months. Offsetting these obligations, it had cash of CN¥241.7m as well as receivables valued at CN¥58.3m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥484.5m.

This is a mountain of leverage relative to its market capitalization of CN¥651.5m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. Despite its noteworthy liabilities, Zhongmin Baihui Retail Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Zhongmin Baihui Retail Group'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.

In the last year Zhongmin Baihui Retail Group wasn't profitable at an EBIT level, but managed to grow its revenue by 6.0%, to CN¥1.1b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Zhongmin Baihui Retail Group?

While Zhongmin Baihui Retail Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥42m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 3 warning signs we've spotted with Zhongmin Baihui Retail Group (including 1 which shouldn't be ignored) .

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. 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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