Trip.com Group (NASDAQ:TCOM) Seems To Use Debt Rather Sparingly

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. We can see that Trip.com Group Limited (NASDAQ:TCOM) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Trip.com Group

What Is Trip.com Group's Debt?

You can click the graphic below for the historical numbers, but it shows that Trip.com Group had CN¥47.3b of debt in March 2024, down from CN¥52.7b, one year before. However, it does have CN¥67.7b in cash offsetting this, leading to net cash of CN¥20.4b.

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

The latest balance sheet data shows that Trip.com Group had liabilities of CN¥86.8b due within a year, and liabilities of CN¥13.1b falling due after that. Offsetting these obligations, it had cash of CN¥67.7b as well as receivables valued at CN¥15.3b due within 12 months. So it has liabilities totalling CN¥16.9b more than its cash and near-term receivables, combined.

Since publicly traded Trip.com Group shares are worth a very impressive total of CN¥204.9b, 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, Trip.com Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Trip.com Group grew its EBIT by 361% over twelve months. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Trip.com Group 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, Trip.com Group actually produced more free cash flow than EBIT over the last two years. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

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¥20.4b. And it impressed us with free cash flow of CN¥21b, being 183% of its EBIT. So we don't think Trip.com Group's use of debt is risky. 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.

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.

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