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.' 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. We note that TravelSky Technology Limited (HKG:696) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is TravelSky Technology's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2023 TravelSky Technology had debt of CN¥951.8m, up from CN¥200.2m in one year. But on the other hand it also has CN¥11.0b in cash, leading to a CN¥10.1b net cash position.

How Strong Is TravelSky Technology's Balance Sheet?

We can see from the most recent balance sheet that TravelSky Technology had liabilities of CN¥6.19b falling due within a year, and liabilities of CN¥288.0m due beyond that. Offsetting these obligations, it had cash of CN¥11.0b as well as receivables valued at CN¥6.74b due within 12 months. So it actually has CN¥11.3b more liquid assets than total liabilities.

This excess liquidity is a great indication that TravelSky Technology's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that TravelSky Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Better yet, TravelSky Technology grew its EBIT by 299% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TravelSky Technology has net cash of CN¥10.1b, as well as more liquid assets than liabilities. The cherry on top was that in converted 144% of that EBIT to free cash flow, bringing in -CN¥390m. The bottom line is that TravelSky Technology's use of debt is absolutely fine. 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, 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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com