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. As with many other companies Zhongmin Baihui Retail Group Ltd. (SGX:5SR) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Zhongmin Baihui Retail Group

What Is Zhongmin Baihui Retail Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2023 Zhongmin Baihui Retail Group had debt of CN¥180.1m, up from CN¥169.6m in one year. But it also has CN¥192.2m in cash to offset that, meaning it has CN¥12.1m net cash.

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

The latest balance sheet data shows that Zhongmin Baihui Retail Group had liabilities of CN¥687.6m due within a year, and liabilities of CN¥301.2m falling due after that. Offsetting these obligations, it had cash of CN¥192.2m as well as receivables valued at CN¥275.1m due within 12 months. So it has liabilities totalling CN¥521.5m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥705.5m, so it does suggest shareholders should keep an eye on Zhongmin Baihui Retail Group's use of debt. 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! When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Zhongmin Baihui Retail Group will need earnings to service that debt. 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.

Over 12 months, Zhongmin Baihui Retail Group made a loss at the EBIT level, and saw its revenue drop to CN¥968m, which is a fall of 9.8%. We would much prefer see growth.

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¥21m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 4 warning signs with Zhongmin Baihui Retail Group (at least 2 which can't be ignored) , and understanding them should be part of your investment process.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.