Is China Cyts Tours Holding (SHSE:600138) Using Too Much 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 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, China Cyts Tours Holding Co., Ltd. (SHSE:600138) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for China Cyts Tours Holding

How Much Debt Does China Cyts Tours Holding Carry?

The chart below, which you can click on for greater detail, shows that China Cyts Tours Holding had CN¥5.73b in debt in September 2023; about the same as the year before. However, because it has a cash reserve of CN¥1.11b, its net debt is less, at about CN¥4.63b.

A Look At China Cyts Tours Holding's Liabilities

According to the last reported balance sheet, China Cyts Tours Holding had liabilities of CN¥7.01b due within 12 months, and liabilities of CN¥2.59b due beyond 12 months. On the other hand, it had cash of CN¥1.11b and CN¥2.50b worth of receivables due within a year. So its liabilities total CN¥6.00b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥7.91b, so it does suggest shareholders should keep an eye on China Cyts Tours Holding's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). Thus we consider debt relative to earnings both with and without depreciation and amortization expenses.

With a net debt to EBITDA ratio of 7.6, it's fair to say China Cyts Tours Holding does have a significant amount of debt. However, its interest coverage of 6.6 is reasonably strong, which is a good sign. We also note that China Cyts Tours Holding improved its EBIT from a last year's loss to a positive CN¥343m. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if China Cyts Tours Holding 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So it is important to check how much of its earnings before interest and tax (EBIT) converts to actual free cash flow. Over the last year, China Cyts Tours Holding recorded free cash flow worth a fulsome 99% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Our View

China Cyts Tours Holding's net debt to EBITDA and level of total liabilities definitely weigh on it, in our esteem. But its conversion of EBIT to free cash flow tells a very different story, and suggests some resilience. Looking at all the angles mentioned above, it does seem to us that China Cyts Tours Holding is a somewhat risky investment as a result of its debt. Not all risk is bad, as it can boost share price returns if it pays off, but this debt risk is worth keeping in mind. 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, we've discovered 2 warning signs for China Cyts Tours Holding (1 is a bit concerning!) that you should be aware of before investing here.

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.