Is Atour Lifestyle Holdings (NASDAQ:ATAT) A Risky Investment?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. We note that Atour Lifestyle Holdings Limited (NASDAQ:ATAT) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Atour Lifestyle Holdings

What Is Atour Lifestyle Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Atour Lifestyle Holdings had CN¥72.0m of debt in December 2023, down from CN¥174.0m, one year before. However, it does have CN¥3.59b in cash offsetting this, leading to net cash of CN¥3.52b.

How Healthy Is Atour Lifestyle Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Atour Lifestyle Holdings had liabilities of CN¥2.38b due within 12 months and liabilities of CN¥2.15b due beyond that. On the other hand, it had cash of CN¥3.59b and CN¥278.0m worth of receivables due within a year. So its liabilities total CN¥656.3m more than the combination of its cash and short-term receivables.

Since publicly traded Atour Lifestyle Holdings shares are worth a total of CN¥17.7b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Atour Lifestyle Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Atour Lifestyle Holdings grew its EBIT by 460% over twelve months. That boost will make it even easier to pay down debt going forward. 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 Atour Lifestyle Holdings'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. Atour Lifestyle Holdings 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. Happily for any shareholders, Atour Lifestyle Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Atour Lifestyle Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥3.52b. And it impressed us with free cash flow of CN¥1.9b, being 198% of its EBIT. So we don't think Atour Lifestyle Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Atour Lifestyle Holdings 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.