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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Zhejiang Sunriver Culture Tourism Co.,Ltd. (SHSE:600576) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Zhejiang Sunriver Culture TourismLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Zhejiang Sunriver Culture TourismLtd had debt of CN¥377.4m, up from CN¥83.9m in one year. But on the other hand it also has CN¥430.0m in cash, leading to a CN¥52.6m net cash position.

How Healthy Is Zhejiang Sunriver Culture TourismLtd's Balance Sheet?

According to the last reported balance sheet, Zhejiang Sunriver Culture TourismLtd had liabilities of CN¥335.3m due within 12 months, and liabilities of CN¥543.7m due beyond 12 months. Offsetting this, it had CN¥430.0m in cash and CN¥94.9m in receivables that were due within 12 months. So it has liabilities totalling CN¥354.1m more than its cash and near-term receivables, combined.

Since publicly traded Zhejiang Sunriver Culture TourismLtd shares are worth a total of CN¥5.58b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Zhejiang Sunriver Culture TourismLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Zhejiang Sunriver Culture TourismLtd grew its EBIT by 102% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Zhejiang Sunriver Culture TourismLtd 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Zhejiang Sunriver Culture TourismLtd 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, Zhejiang Sunriver Culture TourismLtd 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

We could understand if investors are concerned about Zhejiang Sunriver Culture TourismLtd's liabilities, but we can be reassured by the fact it has has net cash of CN¥52.6m. The cherry on top was that in converted 310% of that EBIT to free cash flow, bringing in CN¥147m. So is Zhejiang Sunriver Culture TourismLtd's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Zhejiang Sunriver Culture TourismLtd, you may well want to click here to check an interactive graph of its earnings per share history.

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.