Is Atour Lifestyle Holdings (NASDAQ:ATAT) A Risky Investment?

Some say that volatility, not 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, as debt overload can lead to ruin. We noticed that Atour Lifestyle Holdings Limited (NASDAQ:ATAT) has debt on its balance sheet. But should shareholders be concerned about its use of debt?

When is debt a problem?

Generally, 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. In a worst-case scenario, a company could go bankrupt if it cannot pay its creditors. Although this is not very common, we often see highly indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, debt can be an important tool in companies, especially capital-heavy companies. The first step when considering a company’s debt levels is to look at its cash and debt together.

Check out our latest analysis for Atour Lifestyle Holdings

What is Atour Lifestyle Holdings’ net debt?

You can click on the chart below for the historical numbers, but it shows that Atour Lifestyle Holdings had CNY72.0m of debt in December 2023, down from CNY174.0m, one year earlier. However, it has CNY3.59b of cash to offset this, leading to net cash of CNY3.52b.

How healthy is Atour Lifestyle Holdings’ balance sheet?

Looking at the latest balance sheet data, we can see that Atour Lifestyle Holdings had liabilities of CNY2.38b due within 12 months and liabilities of CNY2.15b due beyond that. On the other hand, it had CNY3.59b in cash and CNY278.0m worth of receivables due within a year. So its liabilities total CN¥656.3m, which is more than the sum of its cash and short-term receivables.

Since Atour Lifestyle Holdings’ publicly traded shares have a combined value of CNY17.7 billion, this level of liabilities is unlikely to pose a significant threat. However, we think it’s worth monitoring the strength of its balance sheet, as it may change over time. While it has noteworthy liabilities, Atour Lifestyle Holdings also has more cash than debt, so we’re quite confident it can manage its debt safely.

Even more impressive is the fact that Atour Lifestyle Holdings increased its EBIT by 460% over the twelve months. This reinforcement will make it easier to pay off debt in the future. Obviously, the balance sheet is the area to focus on when analyzing debt. But it’s future earnings, more than anything else, that will determine Atour Lifestyle Holdings’ ability to maintain a healthy balance sheet going forward. So, if you want to see what the professionals think, you might find it This free report on analyst earnings forecasts To be interesting.

Finally, a company needs free cash flow to pay off debt; Accounting profits don’t cut it. Atour Lifestyle Holdings may have net cash on the balance sheet, but it’s still interesting to consider how well the company converts its earnings before interest and tax (EBIT) into free cash flow, because that will impact its need for, and need for. Ability to manage debt. Fortunately for all shareholders, Atour Lifestyle Holdings actually produced more free cash flow than EBIT over the last three years. There’s nothing better than incoming cash when it comes to staying in the good graces of lenders.

Summary of the above

We can understand if investors are worried about Atour Lifestyle Holdings’ liabilities, but we can take comfort in the fact that it has net cash of CNY3.52b. We were impressed by free cash flow of CNY1.9 billion, representing 198% of EBIT. So we don’t think Atour Lifestyle Holdings’ use of debt is risky. Obviously, the balance sheet is the area to focus on when analyzing debt. But ultimately, every company can contain off-balance sheet risks. Case in point: We’ve been spotted 1 warning sign for Atour Lifestyle Holdings You should be aware.

If, after all that, you’re more interested in a fast-growing company with a strong balance sheet, check this out Our list of net cash growth stocks do not be late.

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This article written by Simply Wall St is general in nature. We provide comments based on historical data and analyst forecasts only using 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 into account your objectives or financial situation. We aim to offer you focused, long-term analysis driven by fundamental data. Note that our analysis may not take into account the company’s most recent price-sensitive announcements or qualitative materials. Simply put, Wall St has no position in any of the stocks mentioned.