We Think Huangshan Tourism DevelopmentLtd (SHSE:600054) Can Manage Its Debt With Ease

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. As with many other companies Huangshan Tourism Development Co.,Ltd. (SHSE:600054) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Huangshan Tourism DevelopmentLtd

What Is Huangshan Tourism DevelopmentLtd's Debt?

As you can see below, Huangshan Tourism DevelopmentLtd had CN¥81.1m of debt at September 2024, down from CN¥216.7m a year prior. But on the other hand it also has CN¥1.76b in cash, leading to a CN¥1.68b net cash position.

How Strong Is Huangshan Tourism DevelopmentLtd's Balance Sheet?

According to the last reported balance sheet, Huangshan Tourism DevelopmentLtd had liabilities of CN¥514.2m due within 12 months, and liabilities of CN¥354.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.76b as well as receivables valued at CN¥80.6m due within 12 months. So it actually has CN¥973.5m 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.

Also good is that Huangshan Tourism DevelopmentLtd grew its EBIT at 19% over the last year, further increasing its ability to manage debt. 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 Huangshan Tourism DevelopmentLtd 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.

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 most recent two years, Huangshan Tourism DevelopmentLtd recorded free cash flow worth 71% 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 investigate a company's debt, in this case Huangshan Tourism DevelopmentLtd has CN¥1.68b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥263m, being 71% of its EBIT. So we don't think Huangshan Tourism DevelopmentLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for Huangshan Tourism DevelopmentLtd that 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.

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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.