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

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 Emei Shan Tourism Co.,Ltd (SZSE:000888) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Emei Shan TourismLtd

What Is Emei Shan TourismLtd's Debt?

As you can see below, Emei Shan TourismLtd had CN¥502.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥1.54b in cash, leading to a CN¥1.04b net cash position.

A Look At Emei Shan TourismLtd's Liabilities

We can see from the most recent balance sheet that Emei Shan TourismLtd had liabilities of CN¥309.6m falling due within a year, and liabilities of CN¥556.3m due beyond that. On the other hand, it had cash of CN¥1.54b and CN¥54.8m worth of receivables due within a year. So it can boast CN¥731.6m more liquid assets than total liabilities.

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

In addition to that, we're happy to report that Emei Shan TourismLtd has boosted its EBIT by 56%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Emei Shan TourismLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Happily for any shareholders, Emei Shan TourismLtd actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Emei Shan TourismLtd has net cash of CN¥1.04b, as well as more liquid assets than liabilities. The cherry on top was that in converted 124% of that EBIT to free cash flow, bringing in CN¥365m. So we don't think Emei Shan TourismLtd's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Emei Shan TourismLtd has 2 warning signs we think you should be aware of.

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.