These 4 Measures Indicate That Tongcheng Travel Holdings (HKG:780) Is Using Debt Safely

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies Tongcheng Travel Holdings Limited (HKG:780) makes use of debt. But the more important question is: how much risk is that debt creating?

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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. 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, 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Tongcheng Travel Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2025 Tongcheng Travel Holdings had CN¥3.93b of debt, an increase on CN¥3.38b, over one year. However, its balance sheet shows it holds CN¥10.9b in cash, so it actually has CN¥7.00b net cash.

A Look At Tongcheng Travel Holdings' Liabilities

We can see from the most recent balance sheet that Tongcheng Travel Holdings had liabilities of CN¥11.6b falling due within a year, and liabilities of CN¥5.32b due beyond that. On the other hand, it had cash of CN¥10.9b and CN¥1.89b worth of receivables due within a year. So its liabilities total CN¥4.13b more than the combination of its cash and short-term receivables.

Of course, Tongcheng Travel Holdings has a market capitalization of CN¥46.6b, 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. Despite its noteworthy liabilities, Tongcheng Travel Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

View our latest analysis for Tongcheng Travel Holdings

On top of that, Tongcheng Travel Holdings grew its EBIT by 63% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. 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¥7.00b. The cherry on top was that in converted 132% of that EBIT to free cash flow, bringing in CN¥2.4b. So is Tongcheng Travel Holdings's debt a risk? It doesn't seem so to us. Another factor that would give us confidence in Tongcheng Travel Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.