Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that UTour Group Co., Ltd. (SZSE:002707) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

What Is UTour Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that UTour Group had CN¥702.0m of debt in June 2024, down from CN¥874.6m, one year before. But it also has CN¥839.1m in cash to offset that, meaning it has CN¥137.1m net cash.

How Strong Is UTour Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that UTour Group had liabilities of CN¥2.05b due within 12 months and liabilities of CN¥14.2m due beyond that. Offsetting these obligations, it had cash of CN¥839.1m as well as receivables valued at CN¥371.1m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥850.6m.

Given UTour Group has a market capitalization of CN¥7.43b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, UTour Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Although UTour Group made a loss at the EBIT level, last year, it was also good to see that it generated CN¥171m in EBIT over the last twelve months. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine UTour Group'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. UTour Group 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 year, UTour Group actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While UTour Group does have more liabilities than liquid assets, it also has net cash of CN¥137.1m. The cherry on top was that in converted 326% of that EBIT to free cash flow, bringing in CN¥555m. So we don't think UTour Group's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in UTour Group, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.