We think Best Mart 360 Holdings (HKG:2360) can manage debt with ease

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett said “volatility is far from synonymous with risk.” When we think of a company’s risk, we always like to look at its use of debt, because over-indebtedness can lead to ruin. We can see that Best Mart 360 Holdings Limited (HKG:2360) uses debt in his business. But does this debt worry shareholders?

Why is debt risky?

Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity at a low price, thereby permanently diluting shareholders. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. The first step when considering a company’s debt levels is to consider its cash and debt together.

Check out our latest analysis for Best Mart 360 Holdings

How much debt does Best Mart 360 Holdings have?

You can click on the chart below for historical numbers, but it shows Best Mart 360 Holdings had HK$83.0 million in debt in March 2022, up from HK$107.5 million a year prior. But he also has HK$160.5 million in cash to offset that, meaning he has a net cash of HK$77.5 million.

SEHK: 2360 Historical Debt to Equity August 17, 2022

A look at the liabilities of Best Mart 360 Holdings

We can see from the most recent balance sheet that Best Mart 360 Holdings had liabilities of HK$349.4 million due in one year, and liabilities of HK$112.7 million due beyond. As compensation for these obligations, it had liquid assets of HK$160.5 million as well as receivables valued at HK$7.24 million and payable within 12 months. Thus, its liabilities outweigh the sum of its cash and (current) receivables of HK$294.4 million.

Of course, Best Mart 360 Holdings has a market capitalization of HK$1.85 billion, so those liabilities are probably manageable. That said, it is clear that we must continue to monitor its record, lest it deteriorate. Despite its notable liabilities, Best Mart 360 Holdings has net cash, so it’s fair to say it doesn’t have heavy debt!

Even more impressive is the fact that Best Mart 360 Holdings increased its EBIT by 104% year-over-year. If sustained, this growth will make debt even more manageable in years to come. There is no doubt that we learn the most about debt from the balance sheet. But it’s the earnings of Best Mart 360 Holdings that will influence the balance sheet going forward. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.

But our last consideration is also important, because a company cannot pay debt with paper profits; he needs cash. Although Best Mart 360 Holdings has net cash on its balance sheet, it’s still worth looking at its ability to convert earnings before interest and taxes (EBIT) to free cash flow, to help us understand how quickly it builds (or erodes) this cash balance. Over the past three years, Best Mart 360 Holdings has actually produced more free cash flow than EBIT. There’s nothing better than incoming money to stay in the good books of your lenders.

Summary

Although Best Mart 360 Holdings has more liabilities than liquid assets, it also has a net cash position of HK$77.5 million. And it impressed us with free cash flow of HK$280 million, or 257% of its EBIT. So is Best Mart 360 Holdings’ debt a risk? This does not seem to us to be the case. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example – Best Mart 360 Holdings has 1 warning sign we think you should know.

If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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