Would Trip.com Group (NASDAQ:TCOM) Be Better Off With Less Debt?

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.' 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 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. If things get really bad, the lenders can take control of the business. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Trip.com Group

How Much Debt Does Trip.com Group Carry?

You can click the graphic below for the historical numbers, but it shows that Trip.com Group had CN¥51.3b of debt in September 2022, down from CN¥57.4b, one year before. However, it also had CN¥47.6b in cash, and so its net debt is CN¥3.70b.

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

The latest balance sheet data shows that Trip.com Group had liabilities of CN¥61.7b due within a year, and liabilities of CN¥21.6b falling due after that. Offsetting these obligations, it had cash of CN¥47.6b as well as receivables valued at CN¥6.15b due within 12 months. So its liabilities total CN¥29.6b more than the combination of its cash and short-term receivables.

Since publicly traded Trip.com Group shares are worth a very impressive total of CN¥165.5b, 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Trip.com Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Trip.com Group had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to CN¥20b. We would much prefer see growth.

Caveat Emptor

Importantly, Trip.com Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥376m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of CN¥1.5b. So we do think this stock is quite risky. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Trip.com Group's profit, revenue, and operating cashflow have changed over the last few years.

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.