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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tripadvisor, Inc. (NASDAQ:TRIP) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. 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. 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.

What Is Tripadvisor's Net Debt?

As you can see below, Tripadvisor had US$840.0m of debt, at March 2024, which is about the same as the year before. You can click the chart for greater detail. However, it does have US$1.17b in cash offsetting this, leading to net cash of US$331.0m.

How Strong Is Tripadvisor's Balance Sheet?

According to the last reported balance sheet, Tripadvisor had liabilities of US$892.0m due within 12 months, and liabilities of US$1.02b due beyond 12 months. Offsetting this, it had US$1.17b in cash and US$292.0m in receivables that were due within 12 months. So it has liabilities totalling US$450.0m more than its cash and near-term receivables, combined.

Of course, Tripadvisor has a market capitalization of US$2.45b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Tripadvisor also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Tripadvisor grew its EBIT by 41% over the last twelve months, and that growth will make it easier to handle its debt. 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 Tripadvisor'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Tripadvisor 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. Happily for any shareholders, Tripadvisor actually produced more free cash flow than EBIT over the last two years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While Tripadvisor does have more liabilities than liquid assets, it also has net cash of US$331.0m. And it impressed us with free cash flow of US$176m, being 214% of its EBIT. So we don't think Tripadvisor's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in Tripadvisor, you may well want to click here to check an interactive graph of its earnings per share history.

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.

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