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.' 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. As with many other companies Yonghui Superstores Co., Ltd. (SHSE:601933) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Yonghui Superstores Carry?

The image below, which you can click on for greater detail, shows that Yonghui Superstores had debt of CN¥6.98b at the end of September 2023, a reduction from CN¥10.5b over a year. However, its balance sheet shows it holds CN¥7.53b in cash, so it actually has CN¥543.7m net cash.

How Strong Is Yonghui Superstores' Balance Sheet?

The latest balance sheet data shows that Yonghui Superstores had liabilities of CN¥25.3b due within a year, and liabilities of CN¥22.0b falling due after that. On the other hand, it had cash of CN¥7.53b and CN¥2.35b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥37.4b.

The deficiency here weighs heavily on the CN¥20.4b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Yonghui Superstores would probably need a major re-capitalization if its creditors were to demand repayment. Yonghui Superstores 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 future earnings, more than anything, that will determine Yonghui Superstores's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Yonghui Superstores made a loss at the EBIT level, and saw its revenue drop to CN¥81b, which is a fall of 12%. That's not what we would hope to see.

So How Risky Is Yonghui Superstores?

While Yonghui Superstores lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥4.9b. 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. For riskier companies like Yonghui Superstores I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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. 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.