Huangshan Tourism DevelopmentLtd (SHSE:600054) Could Easily Take On More Debt

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Huangshan Tourism Development Co.,Ltd. (SHSE:600054) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Huangshan Tourism DevelopmentLtd

How Much Debt Does Huangshan Tourism DevelopmentLtd Carry?

The image below, which you can click on for greater detail, shows that Huangshan Tourism DevelopmentLtd had debt of CN¥40.8m at the end of June 2024, a reduction from CN¥187.5m over a year. But on the other hand it also has CN¥1.70b in cash, leading to a CN¥1.66b net cash position.

A Look At Huangshan Tourism DevelopmentLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Huangshan Tourism DevelopmentLtd had liabilities of CN¥540.7m due within 12 months and liabilities of CN¥355.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.70b as well as receivables valued at CN¥82.5m due within 12 months. So it actually has CN¥884.1m more liquid assets than total liabilities.

This short term liquidity is a sign that Huangshan Tourism DevelopmentLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Huangshan Tourism DevelopmentLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that Huangshan Tourism DevelopmentLtd grew its EBIT by 119% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Huangshan Tourism DevelopmentLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Huangshan Tourism DevelopmentLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last two years, Huangshan Tourism DevelopmentLtd recorded free cash flow worth a fulsome 81% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Huangshan Tourism DevelopmentLtd has net cash of CN¥1.66b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥362m, being 81% of its EBIT. So is Huangshan Tourism DevelopmentLtd's debt a risk? It doesn't seem so to us. 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 example - Huangshan Tourism DevelopmentLtd has 1 warning sign we think 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.