Li Lu, an external fund manager backed by Berkshire Hathaway's Charlie Munger, has stated clearly that “the biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.” So it seems smart investors know that debt, which is usually involved in bankruptcy, is a very important factor when assessing the riskiness of a company. Like many other companies, Tong Cheng Travel Holdings Limited (HKG:780) uses debt. But is this debt a concern for shareholders?
When does debt become a problem?
Debt is a tool to help companies grow, but if a company can't pay its creditors, the company is at their mercy. In the worst cases, it may be unable to repay its creditors and go bankrupt. While this is less common, it is not uncommon for indebted companies to be forced by creditors to raise capital at unfavorable prices, thus permanently diluting shareholder equity. Of course, plenty of companies use debt to fund growth without any negative consequences. When thinking about a company's use of debt, we first look at cash and debt together.
View our latest analysis for Tongcheng Travel Holdings
How much debt does Tongcheng Travel Holdings have?
As you can see below, at the end of March 2024, Tongcheng Travel Holdings had debt of RMB3.38 billion, up from RMB1.97 billion a year earlier. Click the image for more details. However, it also has RMB10 billion in cash to offset that, meaning that its net cash is RMB6.64 billion.
SEHK:780 Debt to Equity Ratio History June 9, 2024
SEHK:780 Debt to Equity Ratio History June 9, 2024A look at Tongcheng Travel Holdings' debt
Zooming in on the latest balance sheet data, we can see that Tongcheng Travel Holdings had liabilities of RMB12.6b due within 12 months, and liabilities of RMB2.11b due beyond that. Offsetting this, it had cash of RMB100m and accounts receivables of RMB1.48b due within 12 months. This means that total liabilities are RMB3.22b more than the combination of its cash and short-term receivables.
With publicly traded Tongcheng Travel Holdings shares totaling RMB37.1b, we think this level of debt is unlikely to pose a significant threat. However, we think it's worth keeping an eye on the strength of its balance sheet, as this may change over time. Tongcheng Travel Holdings does have liabilities worth noting, but as it has more cash than debt, we are confident it can manage its debt safely.
Even more impressive is the fact that Tongcheng Travel Holdings' EBIT grew by 476% over twelve months, an increase that will make it easier to repay that debt in the future. When analysing debt levels, the balance sheet is the obvious place to start, but future earnings above all will determine whether Tongcheng Travel Holdings will be able to maintain a healthy balance sheet going forward. So, if you want to see what the experts think, you might find this free report on analyst profit forecasts to be interesting.
But our final consideration is also important, because a company can't pay off debt with paper profits. It needs cash. Tongcheng Travel Holdings may have net cash on its balance sheet, but it's still interesting to look at how well the company converts its earnings before interest and tax (EBIT) to free cash flow, because that will affect both its need for debt and its ability to manage it. Over the last three years, Tongcheng Travel Holdings generated more free cash flow than EBIT. Nothing beats an inflow of cash to maintain lenders' confidence.
summary
While it's understandable that investors are concerned about Tongcheng Travel Holdings' debt, it's reassuring to know that the company has net cash of RMB6.64b. Even better, 165% of EBIT translates to free cash flow of RMB2.8b. Therefore, we don't think Tongcheng Travel Holdings' use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, any company can have risks off the balance sheet. For example, Tongcheng Travel Holdings has 1 warning sign you should be aware of.
But if you're still 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 of general nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology, and our articles are not intended as financial advice. It is not a recommendation to buy or sell stocks, and does not take into account your objectives or financial situation. We aim to provide long-term analysis driven by fundamental data. Please note that our analysis may not take into account the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any of the stocks mentioned herein.
