We Think TripAdvisor (NASDAQ:TRIP) Has A Fair Chunk Of Debt

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.' 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. We note that TripAdvisor, Inc. (NASDAQ:TRIP) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, 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 March 2021 TripAdvisor had debt of US$805.0m, up from US$700.0m in one year. On the flip side, it has US$674.0m in cash leading to net debt of about US$131.0m.

How Strong Is TripAdvisor's Balance Sheet?

The latest balance sheet data shows that TripAdvisor had liabilities of US$277.0m due within a year, and liabilities of US$1.17b falling due after that. Offsetting this, it had US$674.0m in cash and US$150.0m in receivables that were due within 12 months. So its liabilities total US$623.0m more than the combination of its cash and short-term receivables.

Since publicly traded TripAdvisor shares are worth a total of US$6.05b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year TripAdvisor had a loss before interest and tax, and actually shrunk its revenue by 69%, to US$449m. That makes us nervous, to say the least.

Caveat Emptor

Not only did TripAdvisor's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at US$363m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through US$188m of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 4 warning signs for TripAdvisor (1 can't be ignored) you should be aware of.

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. 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.
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