We Think Tripadvisor (NASDAQ:TRIP) Can Stay On Top Of Its Debt

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 can see that Tripadvisor, Inc. (NASDAQ:TRIP) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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?

The chart below, which you can click on for greater detail, shows that Tripadvisor had US$836.0m in debt in September 2022; about the same as the year before. But on the other hand it also has US$1.07b in cash, leading to a US$230.0m net cash position.

How Strong Is Tripadvisor's Balance Sheet?

The latest balance sheet data shows that Tripadvisor had liabilities of US$573.0m due within a year, and liabilities of US$1.18b falling due after that. On the other hand, it had cash of US$1.07b and US$205.0m worth of receivables due within a year. So its liabilities total US$481.0m more than the combination of its cash and short-term receivables.

Of course, Tripadvisor has a market capitalization of US$3.29b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Tripadvisor boasts net cash, so it's fair to say it does not have a heavy debt load!

Notably, Tripadvisor made a loss at the EBIT level, last year, but improved that to positive EBIT of US$75m in the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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

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$230.0m. The cherry on top was that in converted 600% of that EBIT to free cash flow, bringing in US$450m. 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.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.