Is Tongcheng Travel Holdings (HKG:780) Using Too Much Debt?

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 note that Tongcheng Travel Holdings Limited (HKG:780) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tongcheng Travel Holdings

How Much Debt Does Tongcheng Travel Holdings Carry?

The chart below, which you can click on for greater detail, shows that Tongcheng Travel Holdings had CN¥2.18b in debt in June 2023; about the same as the year before. But on the other hand it also has CN¥8.42b in cash, leading to a CN¥6.24b net cash position.

A Look At Tongcheng Travel Holdings' Liabilities

We can see from the most recent balance sheet that Tongcheng Travel Holdings had liabilities of CN¥8.92b falling due within a year, and liabilities of CN¥2.60b due beyond that. Offsetting this, it had CN¥8.42b in cash and CN¥1.51b in receivables that were due within 12 months. So its liabilities total CN¥1.59b more than the combination of its cash and short-term receivables.

Since publicly traded Tongcheng Travel Holdings shares are worth a total of CN¥31.5b, it seems unlikely that this level of liabilities would be a major 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, Tongcheng Travel Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, Tongcheng Travel Holdings grew its EBIT by 250% 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 ultimately the future profitability of the business will decide if Tongcheng Travel Holdings can strengthen its balance sheet over time. 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. Tongcheng Travel Holdings 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 three years, Tongcheng Travel Holdings 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

We could understand if investors are concerned about Tongcheng Travel Holdings's liabilities, but we can be reassured by the fact it has has net cash of CN¥6.24b. The cherry on top was that in converted 252% of that EBIT to free cash flow, bringing in CN¥1.8b. So is Tongcheng Travel Holdings's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Tongcheng Travel Holdings, you may well want to click here to check an interactive graph of its earnings per share history.

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.