We Think TravelSky Technology (HKG:696) Can Manage Its Debt With Ease

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, TravelSky Technology Limited (HKG:696) does carry debt. 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. 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.

Check out the opportunities and risks within the HK IT industry.

How Much Debt Does TravelSky Technology Carry?

The image below, which you can click on for greater detail, shows that at June 2022 TravelSky Technology had debt of CN¥205.2m, up from none in one year. But on the other hand it also has CN¥11.0b in cash, leading to a CN¥10.8b net cash position.

How Healthy Is TravelSky Technology's Balance Sheet?

According to the last reported balance sheet, TravelSky Technology had liabilities of CN¥5.01b due within 12 months, and liabilities of CN¥369.1m due beyond 12 months. Offsetting these obligations, it had cash of CN¥11.0b as well as receivables valued at CN¥5.15b due within 12 months. So it can boast CN¥10.8b more liquid assets than total liabilities.

It's good to see that TravelSky Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, TravelSky Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that TravelSky Technology saw its EBIT decline by 5.1% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TravelSky Technology'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. TravelSky Technology 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. Happily for any shareholders, TravelSky Technology actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TravelSky Technology has net cash of CN¥10.8b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of CN¥2.3b, being 168% of its EBIT. So we don't think TravelSky Technology's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in TravelSky Technology, you may well want to click here to check an interactive graph of its earnings per share history.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.