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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Trip.com Group Limited (NASDAQ:TCOM) makes use of debt. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Trip.com Group
What Is Trip.com Group's Debt?
You can click the graphic below for the historical numbers, but it shows that Trip.com Group had CN¥51.3b of debt in September 2022, down from CN¥57.4b, one year before. On the flip side, it has CN¥47.6b in cash leading to net debt of about CN¥3.70b.
How Strong Is Trip.com Group's Balance Sheet?
According to the last reported balance sheet, Trip.com Group had liabilities of CN¥61.7b due within 12 months, and liabilities of CN¥21.6b due beyond 12 months. Offsetting these obligations, it had cash of CN¥47.6b as well as receivables valued at CN¥6.15b due within 12 months. So it has liabilities totalling CN¥29.6b more than its cash and near-term receivables, combined.
Since publicly traded Trip.com Group shares are worth a very impressive total of CN¥163.8b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Trip.com Group'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.
In the last year Trip.com Group had a loss before interest and tax, and actually shrunk its revenue by 3.0%, to CN¥20b. That's not what we would hope to see.
Over the last twelve months Trip.com Group produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥376m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥1.5b into a profit. So we do think this stock is quite risky. For riskier companies like Trip.com Group I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.