Is Shanghai Yuyuan Tourist Mart (Group) (SHSE:600655) Using Too Much Debt?

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 Shanghai Yuyuan Tourist Mart (Group) Co., Ltd. (SHSE:600655) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Shanghai Yuyuan Tourist Mart (Group)

How Much Debt Does Shanghai Yuyuan Tourist Mart (Group) Carry?

The chart below, which you can click on for greater detail, shows that Shanghai Yuyuan Tourist Mart (Group) had CN¥40.0b in debt in September 2024; about the same as the year before. However, because it has a cash reserve of CN¥11.6b, its net debt is less, at about CN¥28.4b.

How Healthy Is Shanghai Yuyuan Tourist Mart (Group)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shanghai Yuyuan Tourist Mart (Group) had liabilities of CN¥62.6b due within 12 months and liabilities of CN¥23.7b due beyond that. On the other hand, it had cash of CN¥11.6b and CN¥4.60b worth of receivables due within a year. So its liabilities total CN¥70.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥25.0b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Shanghai Yuyuan Tourist Mart (Group) would probably need a major re-capitalization if its creditors were to demand repayment.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Strangely Shanghai Yuyuan Tourist Mart (Group) has a sky high EBITDA ratio of 24.1, implying high debt, but a strong interest coverage of 1k. So either it has access to very cheap long term debt or that interest expense is going to grow! One way Shanghai Yuyuan Tourist Mart (Group) could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 15%, as it did over the last year. 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 Shanghai Yuyuan Tourist Mart (Group) 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. So it's worth checking how much of that EBIT is backed by free cash flow. During the last three years, Shanghai Yuyuan Tourist Mart (Group) generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Our View

We feel some trepidation about Shanghai Yuyuan Tourist Mart (Group)'s difficulty level of total liabilities, but we've got positives to focus on, too. To wit both its interest cover and conversion of EBIT to free cash flow were encouraging signs. When we consider all the factors discussed, it seems to us that Shanghai Yuyuan Tourist Mart (Group) is taking some risks with its use of debt. While that debt can boost returns, we think the company has enough leverage now. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 4 warning signs for Shanghai Yuyuan Tourist Mart (Group) (1 is concerning!) that you should be aware of before investing here.

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.