Changbai Mountain Tourism (SHSE:603099) Seems To Use Debt Rather Sparingly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Changbai Mountain Tourism Co., Ltd. (SHSE:603099) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Changbai Mountain Tourism

What Is Changbai Mountain Tourism's Debt?

As you can see below, Changbai Mountain Tourism had CN¥68.6m of debt at September 2024, down from CN¥83.5m a year prior. However, its balance sheet shows it holds CN¥294.5m in cash, so it actually has CN¥226.0m net cash.

How Healthy Is Changbai Mountain Tourism's Balance Sheet?

According to the last reported balance sheet, Changbai Mountain Tourism had liabilities of CN¥157.9m due within 12 months, and liabilities of CN¥55.5m due beyond 12 months. On the other hand, it had cash of CN¥294.5m and CN¥70.7m worth of receivables due within a year. So it can boast CN¥151.8m more liquid assets than total liabilities.

Having regard to Changbai Mountain Tourism's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥8.88b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, Changbai Mountain Tourism boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Changbai Mountain Tourism grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Changbai Mountain Tourism'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. While Changbai Mountain Tourism 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. During the last two years, Changbai Mountain Tourism produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changbai Mountain Tourism has net cash of CN¥226.0m, as well as more liquid assets than liabilities. And we liked the look of last year's 29% year-on-year EBIT growth. So is Changbai Mountain Tourism's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with Changbai Mountain Tourism .

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.