The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. Importantly, Yonghui Superstores Co., Ltd. (SHSE:601933) does carry debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Yonghui Superstores's Net Debt?

The image below, which you can click on for greater detail, shows that Yonghui Superstores had debt of CN¥7.12b at the end of March 2024, a reduction from CN¥8.98b over a year. But on the other hand it also has CN¥7.59b in cash, leading to a CN¥469.5m net cash position.

How Strong Is Yonghui Superstores' Balance Sheet?

The latest balance sheet data shows that Yonghui Superstores had liabilities of CN¥22.5b due within a year, and liabilities of CN¥20.7b falling due after that. On the other hand, it had cash of CN¥7.59b and CN¥1.15b worth of receivables due within a year. So its liabilities total CN¥34.5b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's CN¥25.0b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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. There's no doubt that we learn most about debt from the balance sheet. 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¥77b, 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¥4.7b. 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. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Yonghui Superstores's profit, revenue, and operating cashflow have changed over the last few years.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com