Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Best Mart 360 Holdings Limited (HKG:2360) 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Best Mart 360 Holdings

What Is Best Mart 360 Holdings's Debt?

As you can see below, at the end of September 2019, Best Mart 360 Holdings had HK$77.5m of debt, up from HK$73.8m a year ago. Click the image for more detail. But on the other hand it also has HK$219.6m in cash, leading to a HK$142.1m net cash position.

A Look At Best Mart 360 Holdings's Liabilities

Zooming in on the latest balance sheet data, we can see that Best Mart 360 Holdings had liabilities of HK$236.8m due within 12 months and liabilities of HK$135.9m due beyond that. On the other hand, it had cash of HK$219.6m and HK$7.36m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$145.7m.

Since publicly traded Best Mart 360 Holdings shares are worth a total of HK$1.95b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Best Mart 360 Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that Best Mart 360 Holdings has increased its EBIT by 6.6% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is Best Mart 360 Holdings'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Best Mart 360 Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the most recent three years, Best Mart 360 Holdings recorded free cash flow worth 53% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Best Mart 360 Holdings has HK$142.1m in net cash. So we are not troubled with Best Mart 360 Holdings's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Best Mart 360 Holdings you should be aware of.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.