Does Changbai Mountain Tourism (SHSE:603099) Have A Healthy Balance Sheet?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies Changbai Mountain Tourism Co., Ltd. (SHSE:603099) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Changbai Mountain Tourism

What Is Changbai Mountain Tourism's Debt?

As you can see below, Changbai Mountain Tourism had CN¥66.7m of debt at June 2024, down from CN¥83.0m a year prior. However, its balance sheet shows it holds CN¥142.9m in cash, so it actually has CN¥76.2m 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¥114.7m due within 12 months, and liabilities of CN¥55.5m due beyond 12 months. Offsetting this, it had CN¥142.9m in cash and CN¥72.8m in receivables that were due within 12 months. So it can boast CN¥45.6m more liquid assets than total liabilities.

This state of affairs indicates that Changbai Mountain Tourism's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥7.89b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Changbai Mountain Tourism has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Changbai Mountain Tourism grew its EBIT by 1,837% last year, which is an impressive improvement. That boost will make it even 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 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 65% of its EBIT, about what we'd expect. 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 Changbai Mountain Tourism has CN¥76.2m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 1,837% over the last year. So is Changbai Mountain Tourism's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Changbai Mountain Tourism's earnings per share history for free.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.