Tripadvisor (NASDAQ:TRIP) Seems To Use Debt Quite Sensibly

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.' 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. We note that Tripadvisor, Inc. (NASDAQ:TRIP) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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.

See our latest analysis for Tripadvisor

What Is Tripadvisor's Debt?

As you can see below, Tripadvisor had US$835.0m of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has US$1.05b in cash, leading to a US$210.0m net cash position.

How Strong Is Tripadvisor's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tripadvisor had liabilities of US$656.0m due within 12 months and liabilities of US$1.16b due beyond that. On the other hand, it had cash of US$1.05b and US$258.0m worth of receivables due within a year. So its liabilities total US$513.0m more than the combination of its cash and short-term receivables.

Given Tripadvisor has a market capitalization of US$3.20b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Tripadvisor boasts net cash, so it's fair to say it does not have a heavy debt load!

We also note that Tripadvisor improved its EBIT from a last year's loss to a positive US$32m. 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 company can only pay off debt with cold hard cash, not accounting profits. 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. Happily for any shareholders, Tripadvisor actually produced more free cash flow than EBIT over the last year. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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$210.0m. The cherry on top was that in converted 1,019% of that EBIT to free cash flow, bringing in US$326m. So we don't have any problem with Tripadvisor's use of debt. We'd be motivated to research the stock further if we found out that Tripadvisor insiders have bought shares recently. If you would too, then you're in luck, since today we're sharing our list of reported insider transactions for free.

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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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.