Does Starjoy Wellness and Travel (HKG:3662) Have A Healthy Balance Sheet?

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.' 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. We note that Starjoy Wellness and Travel Company Limited (HKG:3662) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

Check out our latest analysis for Starjoy Wellness and Travel

What Is Starjoy Wellness and Travel's Net Debt?

The image below, which you can click on for greater detail, shows that Starjoy Wellness and Travel had debt of CN¥90.0m at the end of June 2024, a reduction from CN¥135.0m over a year. But on the other hand it also has CN¥988.4m in cash, leading to a CN¥898.4m net cash position.

A Look At Starjoy Wellness and Travel's Liabilities

The latest balance sheet data shows that Starjoy Wellness and Travel had liabilities of CN¥1.11b due within a year, and liabilities of CN¥23.2m falling due after that. On the other hand, it had cash of CN¥988.4m and CN¥694.9m worth of receivables due within a year. So it can boast CN¥549.2m more liquid assets than total liabilities.

This surplus liquidity suggests that Starjoy Wellness and Travel's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. 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 Starjoy Wellness and Travel has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Starjoy Wellness and Travel has boosted its EBIT by 43%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Starjoy Wellness and Travel will need earnings to service that debt. 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. Starjoy Wellness and Travel 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. Looking at the most recent two years, Starjoy Wellness and Travel recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that Starjoy Wellness and Travel has net cash of CN¥898.4m and plenty of liquid assets. And it impressed us with its EBIT growth of 43% over the last year. So we don't think Starjoy Wellness and Travel'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. To that end, you should learn about the 2 warning signs we've spotted with Starjoy Wellness and Travel (including 1 which is significant) .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.