Tripadvisor (NASDAQ:TRIP) Has A Pretty Healthy Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 Tripadvisor

What Is Tripadvisor's Net Debt?

The chart below, which you can click on for greater detail, shows that Tripadvisor had US$837.0m in debt in March 2023; about the same as the year before. However, it does have US$1.13b in cash offsetting this, leading to net cash of US$295.0m.

A Look At Tripadvisor's Liabilities

According to the last reported balance sheet, Tripadvisor had liabilities of US$763.0m due within 12 months, and liabilities of US$1.11b due beyond 12 months. Offsetting this, it had US$1.13b in cash and US$258.0m in receivables that were due within 12 months. So its liabilities total US$486.0m more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Tripadvisor has a market capitalization of US$2.31b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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.

It was also good to see that despite losing money on the EBIT line last year, Tripadvisor turned things around in the last 12 months, delivering and EBIT of US$107m. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Tripadvisor has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Tripadvisor actually produced more free cash flow than EBIT over the last year. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While Tripadvisor does have more liabilities than liquid assets, it also has net cash of US$295.0m. And it impressed us with free cash flow of US$391m, being 365% of its EBIT. So we are not troubled with Tripadvisor's debt use. While Tripadvisor didn't make a statutory profit in the last year, its positive EBIT suggests that profitability might not be far away. Click here to see if its earnings are heading in the right direction, over the medium term.

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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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.