Would Yunnan Tourism (SZSE:002059) Be Better Off With Less Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that Yunnan Tourism Co., Ltd. (SZSE:002059) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

View our latest analysis for Yunnan Tourism

What Is Yunnan Tourism's Net Debt?

The image below, which you can click on for greater detail, shows that Yunnan Tourism had debt of CN¥973.6m at the end of September 2023, a reduction from CN¥1.09b over a year. However, it also had CN¥915.9m in cash, and so its net debt is CN¥57.7m.

A Look At Yunnan Tourism's Liabilities

We can see from the most recent balance sheet that Yunnan Tourism had liabilities of CN¥1.78b falling due within a year, and liabilities of CN¥911.5m due beyond that. Offsetting these obligations, it had cash of CN¥915.9m as well as receivables valued at CN¥432.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.34b.

While this might seem like a lot, it is not so bad since Yunnan Tourism has a market capitalization of CN¥5.36b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Carrying virtually no net debt, Yunnan Tourism has a very light debt load indeed. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Yunnan Tourism will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Yunnan Tourism had a loss before interest and tax, and actually shrunk its revenue by 51%, to CN¥435m. That makes us nervous, to say the least.

Caveat Emptor

While Yunnan Tourism's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at CN¥366m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥25m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Yunnan Tourism is showing 1 warning sign in our investment analysis , you should know about...

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.