Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Emei Shan Tourism Co.,Ltd (SZSE:000888) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Emei Shan TourismLtd's Net Debt?

As you can see below, Emei Shan TourismLtd had CN¥502.2m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has CN¥1.54b in cash, leading to a CN¥1.04b net cash position.

How Strong Is Emei Shan TourismLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Emei Shan TourismLtd had liabilities of CN¥309.6m due within 12 months and liabilities of CN¥556.3m due beyond that. Offsetting these obligations, it had cash of CN¥1.54b as well as receivables valued at CN¥54.8m due within 12 months. So it can boast CN¥731.6m more liquid assets than total liabilities.

This surplus suggests that Emei Shan TourismLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Emei Shan TourismLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Emei Shan TourismLtd grew its EBIT by 56% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Emei Shan TourismLtd can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Emei Shan TourismLtd 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 last two years, Emei Shan TourismLtd actually produced more free cash flow than EBIT. 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 investigate a company's debt, in this case Emei Shan TourismLtd has CN¥1.04b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥365m, being 124% of its EBIT. So is Emei Shan TourismLtd's debt a risk? It doesn't seem so to us. 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. For instance, we've identified 2 warning signs for Emei Shan TourismLtd that you should be aware of.

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.

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.