Is Tongcheng Travel Holdings (HKG:780) Using Debt In A Risky Way?

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. We note that Tongcheng Travel Holdings Limited (HKG:780) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

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 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tongcheng Travel Holdings

What Is Tongcheng Travel Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2022 Tongcheng Travel Holdings had debt of CN¥2.30b, up from CN¥113.2m in one year. However, it does have CN¥6.90b in cash offsetting this, leading to net cash of CN¥4.60b.

How Healthy Is Tongcheng Travel Holdings' Balance Sheet?

According to the last reported balance sheet, Tongcheng Travel Holdings had liabilities of CN¥6.12b due within 12 months, and liabilities of CN¥2.93b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.90b as well as receivables valued at CN¥1.21b due within 12 months. So it has liabilities totalling CN¥934.9m more than its cash and near-term receivables, combined.

Of course, Tongcheng Travel Holdings has a market capitalization of CN¥34.6b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Tongcheng Travel Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tongcheng Travel 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.

Over 12 months, Tongcheng Travel Holdings made a loss at the EBIT level, and saw its revenue drop to CN¥6.6b, which is a fall of 13%. That's not what we would hope to see.

So How Risky Is Tongcheng Travel Holdings?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Tongcheng Travel Holdings had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through CN¥689m of cash and made a loss of CN¥146m. Given it only has net cash of CN¥4.60b, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Tongcheng Travel Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.