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. We can see that TravelSky Technology Limited (HKG:696) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for TravelSky Technology

What Is TravelSky Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2022 TravelSky Technology had CN¥205.2m of debt, an increase on none, over one year. But it also has CN¥10.9b in cash to offset that, meaning it has CN¥10.7b net cash.

How Strong Is TravelSky Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TravelSky Technology had liabilities of CN¥5.01b due within 12 months and liabilities of CN¥369.1m due beyond that. On the other hand, it had cash of CN¥10.9b and CN¥5.15b worth of receivables due within a year. So it actually has CN¥10.6b more liquid assets than total liabilities.

It's good to see that TravelSky Technology has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, TravelSky Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Also good is that TravelSky Technology grew its EBIT at 12% over the last year, further increasing its ability to manage debt. 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 TravelSky Technology 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. TravelSky Technology 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. Over the last three years, TravelSky Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case TravelSky Technology has CN¥10.7b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 184% of that EBIT to free cash flow, bringing in CN¥2.5b. So is TravelSky Technology's debt a risk? It doesn't seem so to us. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TravelSky Technology's earnings per share history for free.

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.