Zhongmin Baihui Retail Group (SGX:5SR) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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 December 2020, Zhongmin Baihui Retail Group had CN¥64.2m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has CN¥339.8m in cash, leading to a CN¥275.6m net cash position.

A Look At Zhongmin Baihui Retail Group's Liabilities

The latest balance sheet data shows that Zhongmin Baihui Retail Group had liabilities of CN¥622.9m due within a year, and liabilities of CN¥256.2m falling due after that. Offsetting this, it had CN¥339.8m in cash and CN¥97.1m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥442.2m.

This is a mountain of leverage relative to its market capitalization of CN¥674.6m. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. 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 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 reported revenue of CN¥1.2b, which is a gain of 17%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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 made a statutory profit of CN¥56m. 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. 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. To that end, you should learn about the 2 warning signs we've spotted with Zhongmin Baihui Retail Group (including 1 which can't be ignored) .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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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