The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Changbai Mountain Tourism Co., Ltd. (SHSE:603099) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Changbai Mountain Tourism Carry?

The image below, which you can click on for greater detail, shows that Changbai Mountain Tourism had debt of CN¥68.6m at the end of September 2024, a reduction from CN¥83.5m over a year. However, it does have CN¥294.5m in cash offsetting this, leading to net cash of CN¥226.0m.

A Look At Changbai Mountain Tourism's Liabilities

We can see from the most recent balance sheet that Changbai Mountain Tourism had liabilities of CN¥157.9m falling due within a year, and liabilities of CN¥55.5m due beyond that. On the other hand, it had cash of CN¥294.5m and CN¥70.7m worth of receivables due within a year. So it can boast CN¥151.8m 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¥11.2b 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.

Also positive, Changbai Mountain Tourism grew its EBIT by 29% in the last year, and that should make it easier to pay down debt, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Changbai Mountain Tourism 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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Over the most recent two years, Changbai Mountain Tourism recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While it is always sensible to investigate a company's debt, in this case Changbai Mountain Tourism has CN¥226.0m in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 29% over the last year. So is Changbai Mountain Tourism's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Changbai Mountain Tourism's earnings per share history for free.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.