Zhongmin Baihui Retail Group (SGX:5SR) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Zhongmin Baihui Retail Group Ltd. (SGX:5SR) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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.

View our latest analysis for Zhongmin Baihui Retail Group

How Much Debt Does Zhongmin Baihui Retail Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 Zhongmin Baihui Retail Group had CN¥205.8m of debt, an increase on CN¥135.1m, over one year. On the flip side, it has CN¥174.5m in cash leading to net debt of about CN¥31.3m.

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

We can see from the most recent balance sheet that Zhongmin Baihui Retail Group had liabilities of CN¥681.7m falling due within a year, and liabilities of CN¥252.6m due beyond that. Offsetting this, it had CN¥174.5m in cash and CN¥277.6m in receivables that were due within 12 months. So its liabilities total CN¥482.2m more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥775.9m, 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. 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 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 had a loss before interest and tax, and actually shrunk its revenue by 7.7%, to CN¥968m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Zhongmin Baihui Retail Group produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥68m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of CN¥82m and a profit of CN¥31m. So one might argue that there's still a chance it can get things on the right track. 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. We've identified 3 warning signs with Zhongmin Baihui Retail Group (at least 2 which are concerning) , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

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