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.' 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 can see that TravelSky Technology Limited (HKG:696) does use debt in its business. But should shareholders be worried about its use of debt?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is TravelSky Technology's Debt?

As you can see below, at the end of June 2024, TravelSky Technology had CN¥1.35b of debt, up from CN¥753.4m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥12.5b in cash, so it actually has CN¥11.1b net cash.

How Strong Is TravelSky Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that TravelSky Technology had liabilities of CN¥7.89b due within 12 months and liabilities of CN¥59.2m due beyond that. Offsetting these obligations, it had cash of CN¥12.5b as well as receivables valued at CN¥7.96b due within 12 months. So it can boast CN¥12.5b more liquid assets than total liabilities.

This surplus liquidity suggests that TravelSky Technology's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that TravelSky Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that TravelSky Technology has been able to increase its EBIT by 28% in twelve months, making it easier to pay down debt. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that TravelSky Technology has net cash of CN¥11.1b, as well as more liquid assets than liabilities. And it impressed us with free cash flow of -CN¥81m, being 107% of its EBIT. 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, 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.