David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. Importantly, TravelSky Technology Limited (HKG:696) does carry debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is TravelSky Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2023 TravelSky Technology had CN¥951.8m of debt, an increase on CN¥200.2m, over one year. But it also has CN¥11.0b in cash to offset that, meaning it has CN¥10.0b net cash.

How Healthy Is TravelSky Technology's Balance Sheet?

According to the last reported balance sheet, TravelSky Technology had liabilities of CN¥6.19b due within 12 months, and liabilities of CN¥288.0m due beyond 12 months. Offsetting this, it had CN¥11.0b in cash and CN¥6.74b in receivables that were due within 12 months. So it actually has CN¥11.2b more liquid assets than total liabilities.

This surplus strongly suggests that TravelSky Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, TravelSky Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that TravelSky Technology grew its EBIT by 299% over twelve months. That boost will make it even easier to pay down debt going forward. 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 TravelSky Technology'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TravelSky Technology 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. Over the last three years, TravelSky Technology actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While it is always sensible to investigate a company's debt, in this case TravelSky Technology has CN¥10.0b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 168% of that EBIT to free cash flow, bringing in CN¥137m. At the end of the day we're not concerned about TravelSky Technology's debt. Over time, share prices tend to follow earnings per share, so if you're interested in TravelSky Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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. 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.