We Think Jiangsu Tianmu Lake TourismLtd (SHSE:603136) Can Manage Its Debt With Ease

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 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. We note that Jiangsu Tianmu Lake Tourism Co.,Ltd (SHSE:603136) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Jiangsu Tianmu Lake TourismLtd

What Is Jiangsu Tianmu Lake TourismLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that Jiangsu Tianmu Lake TourismLtd had CN¥50.0m of debt in September 2023, down from CN¥80.0m, one year before. But on the other hand it also has CN¥495.9m in cash, leading to a CN¥445.9m net cash position.

A Look At Jiangsu Tianmu Lake TourismLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Jiangsu Tianmu Lake TourismLtd had liabilities of CN¥199.1m due within 12 months and liabilities of CN¥90.4m due beyond that. Offsetting this, it had CN¥495.9m in cash and CN¥27.7m in receivables that were due within 12 months. So it can boast CN¥234.1m more liquid assets than total liabilities.

This surplus suggests that Jiangsu Tianmu Lake TourismLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Jiangsu Tianmu Lake TourismLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Jiangsu Tianmu Lake TourismLtd grew its EBIT by 4,194% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Jiangsu Tianmu Lake TourismLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Jiangsu Tianmu Lake TourismLtd 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 three years, Jiangsu Tianmu Lake TourismLtd produced sturdy free cash flow equating to 64% 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 Jiangsu Tianmu Lake TourismLtd has CN¥445.9m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 4,194% over the last year. So is Jiangsu Tianmu Lake TourismLtd'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 Jiangsu Tianmu Lake TourismLtd'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.

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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.