Is TravelSky Technology (HKG:696) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that TravelSky Technology Limited (HKG:696) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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.

View our latest analysis for TravelSky Technology

How Much Debt Does TravelSky Technology Carry?

As you can see below, at the end of June 2023, TravelSky Technology had CN¥753.4m of debt, up from CN¥205.2m a year ago. Click the image for more detail. But on the other hand it also has CN¥12.3b in cash, leading to a CN¥11.5b net cash position.

How Healthy Is TravelSky Technology's Balance Sheet?

According to the last reported balance sheet, TravelSky Technology had liabilities of CN¥7.01b due within 12 months, and liabilities of CN¥363.6m due beyond 12 months. On the other hand, it had cash of CN¥12.3b and CN¥6.72b worth of receivables due within a year. So it can boast CN¥11.6b more liquid assets than total liabilities.

This surplus liquidity suggests that TravelSky Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that TravelSky Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, TravelSky Technology grew its EBIT by 116% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TravelSky Technology'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, a company can only pay off debt with cold hard cash, not accounting profits. While TravelSky Technology 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. Happily for any shareholders, TravelSky Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case TravelSky Technology has CN¥11.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.5b, being 190% of its EBIT. When it comes to TravelSky Technology's debt, we sufficiently relaxed that our mind turns to the jacuzzi. 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 TravelSky Technology's earnings per share history for free.

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.