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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Liberty TripAdvisor Holdings, Inc. (NASDAQ:LTRP.A) makes use of debt. But the real question is whether this debt is making the company risky.
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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Liberty TripAdvisor Holdings's Debt?
The image below, which you can click on for greater detail, shows that at March 2021 Liberty TripAdvisor Holdings had debt of US$1.03b, up from US$740.0m in one year. However, because it has a cash reserve of US$720.0m, its net debt is less, at about US$310.0m.
A Look At Liberty TripAdvisor Holdings' Liabilities
According to the last reported balance sheet, Liberty TripAdvisor Holdings had liabilities of US$308.0m due within 12 months, and liabilities of US$2.20b due beyond 12 months. On the other hand, it had cash of US$720.0m and US$147.0m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$1.64b.
The deficiency here weighs heavily on the US$448.0m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Liberty TripAdvisor Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Liberty TripAdvisor Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Liberty TripAdvisor Holdings made a loss at the EBIT level, and saw its revenue drop to US$449m, which is a fall of 69%. That makes us nervous, to say the least.
While Liberty TripAdvisor Holdings's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping US$403m. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. That said, it is possible that the company will turn its fortunes around. Nevertheless, we would not bet on it given that it vaporized US$198m in cash over the last twelve months, and it doesn't have much by way of liquid assets. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 2 warning signs for Liberty TripAdvisor Holdings (1 is significant) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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