We Think Changbai Mountain Tourism (SHSE:603099) Can Stay On Top Of Its Debt

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.' 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. We note that Changbai Mountain Tourism Co., Ltd. (SHSE:603099) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Changbai Mountain Tourism

What Is Changbai Mountain Tourism's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Changbai Mountain Tourism had CN¥75.7m of debt in March 2024, down from CN¥91.2m, one year before. But it also has CN¥192.2m in cash to offset that, meaning it has CN¥116.5m net cash.

How Strong Is Changbai Mountain Tourism's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Changbai Mountain Tourism had liabilities of CN¥98.6m due within 12 months and liabilities of CN¥62.3m due beyond that. On the other hand, it had cash of CN¥192.2m and CN¥65.4m worth of receivables due within a year. So it can boast CN¥96.7m 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 it's very unlikely that the CN¥6.42b company is short on cash, but still worth keeping an eye on the 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.

Although Changbai Mountain Tourism made a loss at the EBIT level, last year, it was also good to see that it generated CN¥205m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Changbai Mountain Tourism can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Changbai Mountain Tourism 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 year, Changbai Mountain Tourism recorded free cash flow worth 69% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changbai Mountain Tourism has CN¥116.5m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥142m, being 69% of its EBIT. So we don't think Changbai Mountain Tourism's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Changbai Mountain Tourism that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.