Here's Why Tripadvisor (NASDAQ:TRIP) Can Manage Its Debt Responsibly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. As with many other companies Tripadvisor, Inc. (NASDAQ:TRIP) makes use of debt. But the real question is whether this debt is making the company risky.

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 examine debt levels, we first consider both cash and debt levels, together.

What Is Tripadvisor's Net Debt?

The chart below, which you can click on for greater detail, shows that Tripadvisor had US$836.0m in debt in December 2024; about the same as the year before. But on the other hand it also has US$1.06b in cash, leading to a US$228.0m net cash position.

How Healthy Is Tripadvisor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tripadvisor had liabilities of US$628.0m due within 12 months and liabilities of US$990.0m due beyond that. Offsetting these obligations, it had cash of US$1.06b as well as receivables valued at US$207.0m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$347.0m.

Tripadvisor has a market capitalization of US$1.57b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, Tripadvisor also has more cash than debt, so we're pretty confident it can manage its debt safely.

See our latest analysis for Tripadvisor

But the bad news is that Tripadvisor has seen its EBIT plunge 17% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Tripadvisor 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Tripadvisor 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. Over the last three years, Tripadvisor actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

Although Tripadvisor's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of US$228.0m. And it impressed us with free cash flow of US$70m, being 154% of its EBIT. So we don't have any problem with Tripadvisor's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Tripadvisor .

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.