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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Changbai Mountain Tourism Co., Ltd. (SHSE:603099) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Changbai Mountain Tourism's Debt?

As you can see below, Changbai Mountain Tourism had CN¥68.3m of debt at June 2024, down from CN¥83.0m a year prior. But on the other hand it also has CN¥142.9m in cash, leading to a CN¥74.6m net cash position.

A Look At Changbai Mountain Tourism's Liabilities

According to the last reported balance sheet, Changbai Mountain Tourism had liabilities of CN¥114.7m due within 12 months, and liabilities of CN¥55.5m due beyond 12 months. Offsetting this, it had CN¥142.9m in cash and CN¥72.8m in receivables that were due within 12 months. So it can boast CN¥45.6m more liquid assets than total liabilities.

Having regard to Changbai Mountain Tourism's size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥6.22b company is struggling for cash, we still think it's worth monitoring its balance sheet. Simply put, the fact that Changbai Mountain Tourism has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, Changbai Mountain Tourism grew its EBIT by 2,028% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine Changbai Mountain Tourism's ability to maintain a healthy balance sheet going forward. 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. While Changbai Mountain Tourism 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. During the last two years, Changbai Mountain Tourism produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Changbai Mountain Tourism has net cash of CN¥74.6m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 2,028% over the last year. So we don't think Changbai Mountain Tourism'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. For example, we've discovered 1 warning sign for Changbai Mountain Tourism that you should be aware of before investing here.

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.