Is 111 (NASDAQ:YI) 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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that 111, Inc. (NASDAQ:YI) does use debt in its business. 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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for 111

What Is 111's Debt?

The image below, which you can click on for greater detail, shows that at December 2020 111 had debt of CN¥198.2m, up from CN¥120.7m in one year. However, it does have CN¥1.49b in cash offsetting this, leading to net cash of CN¥1.29b.

How Healthy Is 111's Balance Sheet?

According to the last reported balance sheet, 111 had liabilities of CN¥1.63b due within 12 months, and liabilities of CN¥66.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.49b as well as receivables valued at CN¥175.7m due within 12 months. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

This state of affairs indicates that 111's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥6.18b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, 111 also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is 111'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.

Over 12 months, 111 reported revenue of CN¥8.2b, which is a gain of 107%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is 111?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months 111 lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥117m and booked a CN¥457m accounting loss. With only CN¥1.29b on the balance sheet, it would appear that its going to need to raise capital again soon. The good news for shareholders is that 111 has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for 111 (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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