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.' 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. Importantly, Bestore Co.,Ltd (SHSE:603719) does carry debt. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.
What Is BestoreLtd's Debt?
You can click the graphic below for the historical numbers, but it shows that BestoreLtd had CN¥125.0m of debt in September 2024, down from CN¥349.2m, one year before. However, its balance sheet shows it holds CN¥1.41b in cash, so it actually has CN¥1.28b net cash.
A Look At BestoreLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that BestoreLtd had liabilities of CN¥1.79b due within 12 months and liabilities of CN¥226.9m due beyond that. On the other hand, it had cash of CN¥1.41b and CN¥423.1m worth of receivables due within a year. So it has liabilities totalling CN¥190.2m more than its cash and near-term receivables, combined.
Since publicly traded BestoreLtd shares are worth a total of CN¥5.17b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, BestoreLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if BestoreLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.
In the last year BestoreLtd had a loss before interest and tax, and actually shrunk its revenue by 11%, to CN¥7.5b. We would much prefer see growth.
So How Risky Is BestoreLtd?
While BestoreLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥8.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for BestoreLtd you should know about.
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.
