Zhejiang Sunriver Culture TourismLtd (SHSE:600576) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Zhejiang Sunriver Culture TourismLtd

What Is Zhejiang Sunriver Culture TourismLtd's Debt?

The image below, which you can click on for greater detail, shows that at June 2024 Zhejiang Sunriver Culture TourismLtd had debt of CN¥340.2m, up from CN¥189.0m in one year. But on the other hand it also has CN¥391.8m in cash, leading to a CN¥51.6m net cash position.

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

According to the last reported balance sheet, Zhejiang Sunriver Culture TourismLtd had liabilities of CN¥366.2m due within 12 months, and liabilities of CN¥503.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥391.8m as well as receivables valued at CN¥131.3m due within 12 months. So its liabilities total CN¥346.5m more than the combination of its cash and short-term receivables.

Since publicly traded Zhejiang Sunriver Culture TourismLtd shares are worth a total of CN¥5.63b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. 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.

In addition to that, we're happy to report that Zhejiang Sunriver Culture TourismLtd has boosted its EBIT by 94%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Zhejiang Sunriver Culture TourismLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. 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. Over the last three years, Zhejiang Sunriver Culture TourismLtd actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Zhejiang Sunriver Culture TourismLtd has CN¥51.6m in net cash. And it impressed us with free cash flow of CN¥61m, being 261% of its EBIT. So we don't think Zhejiang Sunriver Culture TourismLtd's use of debt is 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. For example - Zhejiang Sunriver Culture TourismLtd has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.