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

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. As with many other companies Tongcheng Travel Holdings Limited (HKG:780) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Tongcheng Travel Holdings

What Is Tongcheng Travel Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Tongcheng Travel Holdings had CN¥3.41b of debt, an increase on CN¥1.95b, over one year. But on the other hand it also has CN¥8.71b in cash, leading to a CN¥5.30b net cash position.

A Look At Tongcheng Travel Holdings' Liabilities

According to the last reported balance sheet, Tongcheng Travel Holdings had liabilities of CN¥12.5b due within 12 months, and liabilities of CN¥3.72b due beyond 12 months. On the other hand, it had cash of CN¥8.71b and CN¥1.99b worth of receivables due within a year. So its liabilities total CN¥5.52b more than the combination of its cash and short-term receivables.

Since publicly traded Tongcheng Travel Holdings shares are worth a total of CN¥39.1b, it seems unlikely that this level of liabilities would be a major threat. 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.

In addition to that, we're happy to report that Tongcheng Travel Holdings has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tongcheng Travel Holdings 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, Tongcheng Travel Holdings actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

Although Tongcheng Travel Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥5.30b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in CN¥638m. So we don't think Tongcheng Travel Holdings's use of debt is risky. We'd be very excited to see if Tongcheng Travel Holdings insiders have been snapping up shares. If you are too, then click on this link right now to take a (free) peek at our list of reported insider transactions.

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.