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 Atour Lifestyle Holdings Limited (NASDAQ:ATAT) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Atour Lifestyle Holdings's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Atour Lifestyle Holdings had debt of CN¥92.0m, up from CN¥72.0m in one year. However, its balance sheet shows it holds CN¥4.31b in cash, so it actually has CN¥4.22b net cash.

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¥2.57b due within 12 months 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 its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

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 while it's hard to imagine that the CN¥27.4b company is struggling for cash, we still think it's worth monitoring its 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. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Atour Lifestyle Holdings 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. 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

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. Over time, share prices tend to follow earnings per share, so if you're interested in Atour Lifestyle Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.