These 4 Measures Indicate That Atour Lifestyle Holdings (NASDAQ:ATAT) Is Using Debt Safely

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. As with many other companies Atour Lifestyle Holdings Limited (NASDAQ:ATAT) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Atour Lifestyle Holdings

How Much Debt Does Atour Lifestyle Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Atour Lifestyle Holdings had CN¥92.0m of debt, an increase on CN¥72.0m, over one year. But it also has CN¥4.31b in cash to offset that, meaning it has CN¥4.22b net cash.

A Look At Atour Lifestyle Holdings' Liabilities

We can see from the most recent balance sheet that Atour Lifestyle Holdings had liabilities of CN¥2.57b falling due within a year, and liabilities of CN¥2.05b due beyond that. Offsetting these obligations, it had cash of CN¥4.31b as well as receivables valued at CN¥297.0m due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Atour Lifestyle Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥24.8b company is short on cash, but still worth keeping an eye on the balance sheet. 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.

Better yet, Atour Lifestyle Holdings grew its EBIT by 125% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Atour Lifestyle Holdings can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. Over the last three years, Atour Lifestyle Holdings actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that Atour Lifestyle Holdings has CN¥4.22b in net cash. And it impressed us with free cash flow of CN¥1.6b, being 146% 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. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for Atour Lifestyle Holdings that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.