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. Importantly, SSAW Hotels & Resorts Group Co.,Ltd. (SZSE:301073) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. 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 SSAW Hotels & Resorts GroupLtd's Net Debt?

As you can see below, SSAW Hotels & Resorts GroupLtd had CN¥14.2m of debt at June 2024, down from CN¥19.8m a year prior. But it also has CN¥450.0m in cash to offset that, meaning it has CN¥435.8m net cash.

A Look At SSAW Hotels & Resorts GroupLtd's Liabilities

The latest balance sheet data shows that SSAW Hotels & Resorts GroupLtd had liabilities of CN¥286.7m due within a year, and liabilities of CN¥1.19b falling due after that. On the other hand, it had cash of CN¥450.0m and CN¥92.2m worth of receivables due within a year. So its liabilities total CN¥939.0m more than the combination of its cash and short-term receivables.

Since publicly traded SSAW Hotels & Resorts GroupLtd shares are worth a total of CN¥4.98b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, SSAW Hotels & Resorts GroupLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

If SSAW Hotels & Resorts GroupLtd can keep growing EBIT at last year's rate of 16% over the last year, then it will find its debt load easier to manage. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine SSAW Hotels & Resorts GroupLtd's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While SSAW Hotels & Resorts GroupLtd 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 three years, SSAW Hotels & Resorts GroupLtd produced sturdy free cash flow equating to 68% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although SSAW Hotels & Resorts GroupLtd's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥435.8m. And it impressed us with free cash flow of CN¥132m, being 68% of its EBIT. So we don't have any problem with SSAW Hotels & Resorts GroupLtd's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that SSAW Hotels & Resorts GroupLtd is showing 3 warning signs in our investment analysis , and 1 of those is concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.