Is TripAdvisor (NASDAQ:TRIP) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies TripAdvisor, Inc. (NASDAQ:TRIP) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for TripAdvisor

How Much Debt Does TripAdvisor Carry?

The image below, which you can click on for greater detail, shows that at September 2020 TripAdvisor had debt of US$348.0m, up from none in one year. But on the other hand it also has US$446.0m in cash, leading to a US$98.0m net cash position.

How Strong Is TripAdvisor's Balance Sheet?

The latest balance sheet data shows that TripAdvisor had liabilities of US$231.0m due within a year, and liabilities of US$857.0m falling due after that. Offsetting this, it had US$446.0m in cash and US$146.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by US$496.0m.

Of course, TripAdvisor has a market capitalization of US$4.40b, so these liabilities are probably manageable. 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, TripAdvisor also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine TripAdvisor's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year TripAdvisor had a loss before interest and tax, and actually shrunk its revenue by 48%, to US$823m. That makes us nervous, to say the least.

So How Risky Is TripAdvisor?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that TripAdvisor had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through US$189m of cash and made a loss of US$201m. With only US$98.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with TripAdvisor .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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