Dalian Sunasia Tourism HoldingLTD (SHSE:600593) Has A Pretty Healthy Balance Sheet

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, Dalian Sunasia Tourism Holding CO.,LTD (SHSE:600593) 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Dalian Sunasia Tourism HoldingLTD

How Much Debt Does Dalian Sunasia Tourism HoldingLTD Carry?

You can click the graphic below for the historical numbers, but it shows that Dalian Sunasia Tourism HoldingLTD had CN¥638.8m of debt in September 2024, down from CN¥674.3m, one year before. However, because it has a cash reserve of CN¥159.5m, its net debt is less, at about CN¥479.3m.

How Strong Is Dalian Sunasia Tourism HoldingLTD's Balance Sheet?

We can see from the most recent balance sheet that Dalian Sunasia Tourism HoldingLTD had liabilities of CN¥987.4m falling due within a year, and liabilities of CN¥697.3m due beyond that. Offsetting this, it had CN¥159.5m in cash and CN¥8.94m in receivables that were due within 12 months. So its liabilities total CN¥1.52b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Dalian Sunasia Tourism HoldingLTD is worth CN¥6.58b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Dalian Sunasia Tourism HoldingLTD's net debt is sitting at a very reasonable 2.1 times its EBITDA, while its EBIT covered its interest expense just 5.7 times last year. While that doesn't worry us too much, it does suggest the interest payments are somewhat of a burden. We note that Dalian Sunasia Tourism HoldingLTD grew its EBIT by 24% in the last year, and that should make it easier to pay down debt, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Dalian Sunasia Tourism HoldingLTD's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. During the last two years, Dalian Sunasia Tourism HoldingLTD generated free cash flow amounting to a very robust 80% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

The good news is that Dalian Sunasia Tourism HoldingLTD's demonstrated ability to convert EBIT to free cash flow delights us like a fluffy puppy does a toddler. And the good news does not stop there, as its EBIT growth rate also supports that impression! Taking all this data into account, it seems to us that Dalian Sunasia Tourism HoldingLTD takes a pretty sensible approach to debt. While that brings some risk, it can also enhance returns for shareholders. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Dalian Sunasia Tourism HoldingLTD is showing 3 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.