China Tourism Group Duty Free (SHSE:601888) Seems To Use Debt Rather Sparingly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that China Tourism Group Duty Free Corporation Limited (SHSE:601888) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for China Tourism Group Duty Free

How Much Debt Does China Tourism Group Duty Free Carry?

As you can see below, China Tourism Group Duty Free had CN¥3.77b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥32.0b in cash to offset that, meaning it has CN¥28.2b net cash.

How Healthy Is China Tourism Group Duty Free's Balance Sheet?

We can see from the most recent balance sheet that China Tourism Group Duty Free had liabilities of CN¥11.2b falling due within a year, and liabilities of CN¥4.44b due beyond that. On the other hand, it had cash of CN¥32.0b and CN¥900.7m worth of receivables due within a year. So it actually has CN¥17.3b more liquid assets than total liabilities.

This short term liquidity is a sign that China Tourism Group Duty Free could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that China Tourism Group Duty Free has more cash than debt is arguably a good indication that it can manage its debt safely.

But the other side of the story is that China Tourism Group Duty Free saw its EBIT decline by 2.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine China Tourism Group Duty Free'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While China Tourism Group Duty Free 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 most recent three years, China Tourism Group Duty Free recorded free cash flow worth 73% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Tourism Group Duty Free has CN¥28.2b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥5.4b, being 73% of its EBIT. So we don't think China Tourism Group Duty Free's use of debt is risky. 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 - China Tourism Group Duty Free has 1 warning sign we think you should be aware of.

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.