We Think Emei Shan TourismLtd (SZSE:000888) Can Manage Its Debt With Ease

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Emei Shan Tourism Co.,Ltd (SZSE:000888) does use debt in its business. But should shareholders be worried about its use of debt?

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. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Emei Shan TourismLtd Carry?

The chart below, which you can click on for greater detail, shows that Emei Shan TourismLtd had CN¥496.6m in debt in June 2024; about the same as the year before. But it also has CN¥1.38b in cash to offset that, meaning it has CN¥884.8m net cash.

How Healthy Is Emei Shan TourismLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Emei Shan TourismLtd had liabilities of CN¥273.8m due within 12 months and liabilities of CN¥550.3m due beyond that. On the other hand, it had cash of CN¥1.38b and CN¥74.9m worth of receivables due within a year. So it can boast CN¥632.2m 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.

Better yet, Emei Shan TourismLtd grew its EBIT by 741% 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 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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 two years, Emei Shan TourismLtd actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥884.8m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥289m, being 134% of its EBIT. So we don't think Emei Shan TourismLtd's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Emei Shan TourismLtd is showing 2 warning signs in our investment analysis , you should know about...

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.