These 4 Measures Indicate That Emei Shan TourismLtd (SZSE:000888) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Emei Shan Tourism Co.,Ltd (SZSE:000888) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Emei Shan TourismLtd

What Is Emei Shan TourismLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that Emei Shan TourismLtd had CN¥504.4m in debt in March 2024; about the same as the year before. But on the other hand it also has CN¥1.39b in cash, leading to a CN¥890.4m net cash position.

A Look At Emei Shan TourismLtd's Liabilities

According to the last reported balance sheet, Emei Shan TourismLtd had liabilities of CN¥262.8m due within 12 months, and liabilities of CN¥544.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.39b as well as receivables valued at CN¥48.3m due within 12 months. So it actually has CN¥636.0m more liquid assets than total liabilities.

This short term liquidity is a sign that Emei Shan TourismLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Emei Shan TourismLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Although Emei Shan TourismLtd made a loss at the EBIT level, last year, it was also good to see that it generated CN¥337m in EBIT over the last twelve months. 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 Emei Shan TourismLtd 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. While Emei Shan 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. Over the last year, Emei Shan TourismLtd recorded free cash flow worth a fulsome 100% of its EBIT, which is stronger than we'd usually expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Emei Shan TourismLtd has CN¥890.4m in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥337m, being 100% of its EBIT. So we don't think Emei Shan TourismLtd'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. To that end, you should be aware of the 3 warning signs we've spotted with Emei Shan TourismLtd .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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