TravelSky Technology (HKG:696) Has A Pretty Healthy Balance Sheet

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, TravelSky Technology Limited (HKG:696) 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

See our latest analysis for TravelSky Technology

What Is TravelSky Technology's Net Debt?

As you can see below, at the end of December 2022, TravelSky Technology had CN¥200.2m of debt, up from CN¥2.50m a year ago. Click the image for more detail. But on the other hand it also has CN¥10.9b in cash, leading to a CN¥10.7b net cash position.

How Healthy Is TravelSky Technology's Balance Sheet?

The latest balance sheet data shows that TravelSky Technology had liabilities of CN¥5.14b due within a year, and liabilities of CN¥352.6m falling due after that. Offsetting this, it had CN¥10.9b in cash and CN¥5.47b in receivables that were due within 12 months. So it actually has CN¥10.9b more liquid assets than total liabilities.

This excess liquidity suggests that TravelSky Technology is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that TravelSky Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that TravelSky Technology's load is not too heavy, because its EBIT was down 37% over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. 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 TravelSky Technology can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TravelSky Technology 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. Happily for any shareholders, TravelSky Technology actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While it is always sensible to investigate a company's debt, in this case TravelSky Technology has CN¥10.7b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥1.0b, being 410% of its EBIT. So is TravelSky Technology's debt a risk? It doesn't seem so to us. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with TravelSky Technology , and understanding them should be part of your investment process.

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.