Tongcheng Travel Holdings (HKG:780) Has A Pretty Healthy Balance Sheet

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. 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?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tongcheng Travel Holdings

How Much Debt Does Tongcheng Travel Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 Tongcheng Travel Holdings had CN¥2.10b of debt, an increase on CN¥128.1m, over one year. However, it does have CN¥7.15b in cash offsetting this, leading to net cash of CN¥5.05b.

A Look At Tongcheng Travel Holdings' Liabilities

According to the last reported balance sheet, Tongcheng Travel Holdings had liabilities of CN¥4.93b due within 12 months, and liabilities of CN¥3.47b due beyond 12 months. Offsetting this, it had CN¥7.15b in cash and CN¥1.30b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Tongcheng Travel Holdings' balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the CN¥31.8b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Tongcheng Travel Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Tongcheng Travel Holdings's saving grace is its low debt levels, because its EBIT has tanked 68% in the last twelve months. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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'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. 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

While it is always sensible to investigate a company's debt, in this case Tongcheng Travel Holdings has CN¥5.05b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥557m, being 177% of its EBIT. So we are not troubled with Tongcheng Travel Holdings's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tongcheng Travel Holdings is showing 2 warning signs in our investment analysis , you should know about...

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.