Does Trip.com Group (NASDAQ:TCOM) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, Trip.com Group Limited (NASDAQ:TCOM) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Trip.com Group

How Much Debt Does Trip.com Group Carry?

The image below, which you can click on for greater detail, shows that Trip.com Group had debt of CN¥45.7b at the end of September 2024, a reduction from CN¥50.5b over a year. But it also has CN¥76.3b in cash to offset that, meaning it has CN¥30.6b net cash.

How Healthy Is Trip.com Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Trip.com Group had liabilities of CN¥80.4b due within 12 months and liabilities of CN¥23.7b due beyond that. Offsetting this, it had CN¥76.3b in cash and CN¥13.8b in receivables that were due within 12 months. So it has liabilities totalling CN¥14.0b more than its cash and near-term receivables, combined.

Given Trip.com Group has a humongous market capitalization of CN¥343.7b, it's hard to believe these liabilities pose much threat. 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, Trip.com Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Trip.com Group has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. 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 Trip.com Group'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, a company can only pay off debt with cold hard cash, not accounting profits. While Trip.com Group 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, Trip.com Group actually produced more free cash flow than EBIT over the last two years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about Trip.com Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥30.6b. And it impressed us with free cash flow of CN¥21b, being 162% of its EBIT. So is Trip.com Group'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 Trip.com Group, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.