These 4 Measures Indicate That China Tourism Group Duty Free (SHSE:601888) Is Using Debt Safely

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies China Tourism Group Duty Free Corporation Limited (SHSE:601888) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See 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¥2.96b of debt at June 2024, down from CN¥3.48b a year prior. But it also has CN¥33.2b in cash to offset that, meaning it has CN¥30.2b net cash.

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

The latest balance sheet data shows that China Tourism Group Duty Free had liabilities of CN¥11.8b due within a year, and liabilities of CN¥4.55b falling due after that. Offsetting this, it had CN¥33.2b in cash and CN¥2.08b in receivables that were due within 12 months. So it can boast CN¥19.0b 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. Succinctly put, China Tourism Group Duty Free boasts net cash, so it's fair to say it does not have a heavy debt load!

And we also note warmly that China Tourism Group Duty Free grew its EBIT by 11% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Tourism Group Duty Free may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, China Tourism Group Duty Free recorded free cash flow worth 67% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case China Tourism Group Duty Free has CN¥30.2b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 67% of that EBIT to free cash flow, bringing in CN¥9.2b. So we don't think China Tourism Group Duty Free's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for China Tourism Group Duty Free that you should be aware of.

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.