Is Zhongmin Baihui Retail Group (SGX:5SR) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 note that Zhongmin Baihui Retail Group Ltd. (SGX:5SR) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 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. 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.

See our latest analysis for Zhongmin Baihui Retail Group

How Much Debt Does Zhongmin Baihui Retail Group Carry?

As you can see below, Zhongmin Baihui Retail Group had CN¥135.1m of debt, at December 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥167.9m in cash, so it actually has CN¥32.8m 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¥729.1m due within a year, and liabilities of CN¥296.0m falling due after that. Offsetting this, it had CN¥167.9m in cash and CN¥226.7m in receivables that were due within 12 months. So its liabilities total CN¥630.4m more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥557.5m market capitalization, you might well be inclined to review the balance sheet intently. 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Zhongmin Baihui Retail Group'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.

In the last year Zhongmin Baihui Retail Group's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd 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 generated positive free cash flow CN¥76m. 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. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Zhongmin Baihui Retail Group has 4 warning signs (and 2 which are concerning) we think you should know about.

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.