Is Zhejiang Sunriver Culture TourismLtd (SHSE:600576) A Risky Investment?

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 note that Zhejiang Sunriver Culture Tourism Co.,Ltd. (SHSE:600576) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Zhejiang Sunriver Culture TourismLtd

What Is Zhejiang Sunriver Culture TourismLtd's Net Debt?

As you can see below, at the end of March 2024, Zhejiang Sunriver Culture TourismLtd had CN¥377.4m of debt, up from CN¥83.9m a year ago. Click the image for more detail. But on the other hand it also has CN¥430.0m in cash, leading to a CN¥52.6m net cash position.

How Healthy Is Zhejiang Sunriver Culture TourismLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Zhejiang Sunriver Culture TourismLtd had liabilities of CN¥335.3m due within 12 months and liabilities of CN¥543.7m due beyond that. On the other hand, it had cash of CN¥430.0m and CN¥94.9m worth of receivables due within a year. So its liabilities total CN¥354.1m more than the combination of its cash and short-term receivables.

Given Zhejiang Sunriver Culture TourismLtd has a market capitalization of CN¥5.58b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Zhejiang Sunriver Culture TourismLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Zhejiang Sunriver Culture TourismLtd grew its EBIT by 102% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Zhejiang Sunriver Culture 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Zhejiang Sunriver Culture 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, Zhejiang Sunriver Culture TourismLtd actually produced more free cash flow than EBIT over the last three years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

We could understand if investors are concerned about Zhejiang Sunriver Culture TourismLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥52.6m. And it impressed us with free cash flow of CN¥147m, being 310% of its EBIT. So we don't think Zhejiang Sunriver Culture TourismLtd's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Zhejiang Sunriver Culture TourismLtd, you may well want to click here to check an interactive graph of its earnings per share history.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.