Is Orange Tour Cultural Holding (HKG:8627) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Orange Tour Cultural Holding Limited (HKG:8627) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Orange Tour Cultural Holding

What Is Orange Tour Cultural Holding's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 Orange Tour Cultural Holding had CN¥12.2m of debt, an increase on CN¥3.68m, over one year. But on the other hand it also has CN¥100.5m in cash, leading to a CN¥88.3m net cash position.

A Look At Orange Tour Cultural Holding's Liabilities

Zooming in on the latest balance sheet data, we can see that Orange Tour Cultural Holding had liabilities of CN¥23.1m due within 12 months and no liabilities due beyond that. Offsetting this, it had CN¥100.5m in cash and CN¥7.56m in receivables that were due within 12 months. So it can boast CN¥84.9m more liquid assets than total liabilities.

This surplus strongly suggests that Orange Tour Cultural Holding has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Orange Tour Cultural Holding has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Orange Tour Cultural Holding turned things around in the last 12 months, delivering and EBIT of CN¥4.0m. There's no doubt that we learn most about debt from the balance sheet. But it is Orange Tour Cultural Holding's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Orange Tour Cultural Holding 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 year, Orange Tour Cultural Holding reported free cash flow worth 6.5% of its EBIT, which is really quite low. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Orange Tour Cultural Holding has net cash of CN¥88.3m and plenty of liquid assets. So is Orange Tour Cultural Holding's debt a risk? It doesn't seem so to us. 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. We've identified 4 warning signs with Orange Tour Cultural Holding (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.