We Think Tripadvisor (NASDAQ:TRIP) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Tripadvisor, Inc. (NASDAQ:TRIP) does carry debt. But the real question is whether this debt is making the company risky.

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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.

View our latest analysis for Tripadvisor

How Much Debt Does Tripadvisor Carry?

As you can see below, Tripadvisor had US$839.0m of debt, at September 2023, 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$1.12b in cash, leading to a US$285.0m net cash position.

A Look At Tripadvisor's Liabilities

Zooming in on the latest balance sheet data, we can see that Tripadvisor had liabilities of US$719.0m due within 12 months and liabilities of US$1.09b due beyond that. Offsetting this, it had US$1.12b in cash and US$234.0m in receivables that were due within 12 months. So its liabilities total US$455.0m more than the combination of its cash and short-term receivables.

Given Tripadvisor has a market capitalization of US$2.71b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

And we also note warmly that Tripadvisor grew its EBIT by 18% last year, making its debt load easier to handle. 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. Happily for any shareholders, Tripadvisor actually produced more free cash flow than EBIT over the last two years. 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$285.0m. And it impressed us with free cash flow of US$152m, being 325% of its EBIT. So we don't think Tripadvisor's use of debt is risky. Even though Tripadvisor lost money on the bottom line, its positive EBIT suggests the business itself has potential. So you might want to check out how earnings have been trending over the last few years.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.