Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, Atour Lifestyle Holdings Limited (NASDAQ:ATAT) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt Dangerous?
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. If things get really bad, the lenders can take control of the business. 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 think about a company's use of debt, we first look at cash and debt together.
What Is Atour Lifestyle Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 Atour Lifestyle Holdings had CN¥92.0m of debt, an increase on CN¥72.8m, over one year. However, it does have CN¥4.33b in cash offsetting this, leading to net cash of CN¥4.24b.
How Strong Is Atour Lifestyle Holdings' Balance Sheet?
We can see from the most recent balance sheet that Atour Lifestyle Holdings had liabilities of CN¥2.54b falling due within a year, and liabilities of CN¥2.09b due beyond that. On the other hand, it had cash of CN¥4.33b and CN¥288.7m worth of receivables due within a year. So these liquid assets roughly match the total liabilities.
Having regard to Atour Lifestyle Holdings' size, it seems that its liquid assets are well balanced with its total liabilities. So while it's hard to imagine that the CN¥19.8b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Atour Lifestyle Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
Better yet, Atour Lifestyle Holdings grew its EBIT by 190% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 Atour Lifestyle Holdings'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. Atour Lifestyle Holdings 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 three years, Atour Lifestyle Holdings 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
We could understand if investors are concerned about Atour Lifestyle Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥4.24b. And it impressed us with free cash flow of CN¥1.8b, being 165% of its EBIT. So we don't think Atour Lifestyle Holdings's use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Atour Lifestyle Holdings that you should be aware of before investing here.
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.