Yahoo Finance Tripadvisor (NASDAQ:TRIP) Seems To Use Debt Quite Sensibly
David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 Tripadvisor, Inc. (NASDAQ:TRIP) does use debt in its business. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for Tripadvisor
What Is Tripadvisor's Debt?
The chart below, which you can click on for greater detail, shows that Tripadvisor had US$835.0m in debt in June 2022; about the same as the year before. But on the other hand it also has US$1.05b in cash, leading to a US$210.0m net cash position.
How Strong Is Tripadvisor's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tripadvisor had liabilities of US$656.0m due within 12 months and liabilities of US$1.16b due beyond that. Offsetting these obligations, it had cash of US$1.05b as well as receivables valued at US$258.0m due within 12 months. So its liabilities total US$513.0m more than the combination of its cash and short-term receivables.
Given Tripadvisor has a market capitalization of US$3.34b, it's hard to believe these liabilities pose much 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, Tripadvisor also has more cash than debt, so we're pretty confident it can manage its debt safely.
Notably, Tripadvisor made a loss at the EBIT level, last year, but improved that to positive EBIT of US$32m in the last twelve months. 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 Tripadvisor'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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Tripadvisor 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 year, Tripadvisor actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.
Summing Up
Although Tripadvisor's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$210.0m. And it impressed us with free cash flow of US$326m, being 1,019% of its EBIT. So we are not troubled with Tripadvisor's debt use. Of course, we wouldn't say no to the extra confidence that we'd gain if we knew that Tripadvisor insiders have been buying shares: if you're on the same wavelength, you can find out if insiders are buying by clicking this link.
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.
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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.
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