Would the Trip.com Group (NASDAQ:TCOM) be better off with less debt?
Berkshire Hathaway’s Charlie Munger-backed outside fund manager Li Lu is quick to say, “The biggest risk in investing isn’t price volatility, but whether you’re going to suffer a permanent loss of capital “. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. We note that Trip.com Group Limited (NASDAQ:TCOM) has debt on its balance sheet. But does this debt worry shareholders?
Why is debt risky?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. In the worst case, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still costly) situation is when a company has to dilute shareholders at a cheap share price just to keep debt under control. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for Trip.com Group
What is the debt of the Trip.com group?
The image below, which you can click on for more details, shows that the Trip.com Group had debt of 51.0 billion yen at the end of December 2021, a reduction from 56.4 billion yen over one year. However, since it has a cash reserve of 49.4 billion Canadian yen, its net debt is less, at around 1.58 billion Canadian yen.
A look at the responsibilities of the Trip.com group
We can see from the most recent balance sheet that Trip.com Group had liabilities of 66.2 billion yen due within one year, and liabilities of 15.2 billion yen due beyond that. In return for these bonds, it had cash of 49.4 billion yen as well as receivables valued at 10.6 billion yen due within 12 months. Thus, its liabilities total 21.4 billion Canadian yen more than the combination of its cash and short-term receivables.
The Trip.com Group has a very large market capitalization of 92.0 billion Canadian yen, so it could very likely raise funds to improve its balance sheet, should the need arise. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. When analyzing debt levels, the balance sheet is the obvious starting point. But it is future earnings, more than anything, that will determine the Trip.com Group’s ability to maintain a healthy balance sheet in the future. So if you are focused on the future, you can check out this free report showing analyst earnings forecast.
Year-over-year, Trip.com Group reported revenue of 20 billion Canadian yen, a 9.3% gain, although it reported no earnings before interest and taxes. This growth rate is a little slow for our liking, but it takes all types to make a world.
It is important to note that Trip.com Group posted a loss in earnings before interest and taxes (EBIT) over the past year. To be precise, the EBIT loss amounted to CN 1.4 billion yen. Considering that alongside the liabilities mentioned above, this doesn’t give us much confidence that the company should use so much debt. Quite frankly, we think the track record falls short, although it could improve over time. We would feel better if he turned his 550 million Canadian yen year-over-year loss into a profit. We therefore believe that this title is quite risky. When we look at a riskier business, we like to check how its profits (or losses) have changed over time. Today, we provide readers with this interactive chart showing how the Trip.com Group’s earnings, revenue, and operating cash flow have changed over the past several years.
In the end, it’s often best to focus on companies that aren’t in debt. You can access our special list of these companies (all with a track record of earnings growth). It’s free.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.