Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 can see that Better Life Commercial Chain Share Co.,Ltd (SZSE:002251) does use debt in its business. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
How Much Debt Does Better Life Commercial Chain ShareLtd Carry?
The image below, which you can click on for greater detail, shows that Better Life Commercial Chain ShareLtd had debt of CN¥8.43b at the end of September 2024, a reduction from CN¥10.3b over a year. However, it also had CN¥1.29b in cash, and so its net debt is CN¥7.14b.
A Look At Better Life Commercial Chain ShareLtd's Liabilities
The latest balance sheet data shows that Better Life Commercial Chain ShareLtd had liabilities of CN¥4.51b due within a year, and liabilities of CN¥10.1b falling due after that. On the other hand, it had cash of CN¥1.29b and CN¥161.8m worth of receivables due within a year. So its liabilities total CN¥13.1b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the CN¥8.66b 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, Better Life Commercial Chain ShareLtd would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Better Life Commercial Chain ShareLtd'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 Better Life Commercial Chain ShareLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 3.3%, to CN¥3.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
Caveat Emptor
Over the last twelve months Better Life Commercial Chain ShareLtd produced an earnings before interest and tax (EBIT) loss. Indeed, it lost CN¥441m at the EBIT level. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it had negative free cash flow of CN¥883m over the last twelve months. That means it's on the risky side of things. 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. For instance, we've identified 3 warning signs for Better Life Commercial Chain ShareLtd (2 are significant) you should be aware of.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.
