Is Liberty TripAdvisor Holdings (NASDAQ:LTRP.A) Using Debt In A Risky Way?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Liberty TripAdvisor Holdings, Inc. (NASDAQ:LTRP.A) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

View our latest analysis for Liberty TripAdvisor Holdings

What Is Liberty TripAdvisor Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2021 Liberty TripAdvisor Holdings had debt of US$1.36b, up from US$531.0m in one year. On the flip side, it has US$722.0m in cash leading to net debt of about US$635.0m.

A Look At Liberty TripAdvisor Holdings' Liabilities

We can see from the most recent balance sheet that Liberty TripAdvisor Holdings had liabilities of US$364.0m falling due within a year, and liabilities of US$1.96b due beyond that. On the other hand, it had cash of US$722.0m and US$250.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.36b.

This deficit casts a shadow over the US$209.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Liberty TripAdvisor Holdings would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Liberty TripAdvisor Holdings will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Liberty TripAdvisor Holdings made a loss at the EBIT level, and saw its revenue drop to US$777m, which is a fall of 5.6%. We would much prefer see growth.

Caveat Emptor

Importantly, Liberty TripAdvisor Holdings had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping US$249m. When you combine this with the very significant balance sheet liabilities mentioned above, we are so wary of it that we are basically at a loss for the right words. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated US$30m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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 Liberty TripAdvisor Holdings is showing 2 warning signs in our investment analysis , and 1 of those is potentially serious...

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.