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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. 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.
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company 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.
How Much Debt Does TravelSky Technology Carry?
The image below, which you can click on for greater detail, shows that at December 2024 TravelSky Technology had debt of CN¥1.20b, up from CN¥951.8m in one year. However, its balance sheet shows it holds CN¥12.8b in cash, so it actually has CN¥11.6b net cash.
How Strong Is TravelSky Technology's Balance Sheet?
We can see from the most recent balance sheet that TravelSky Technology had liabilities of CN¥6.72b falling due within a year, and liabilities of CN¥72.9m due beyond that. Offsetting this, it had CN¥12.8b in cash and CN¥7.37b in receivables that were due within 12 months. So it can boast CN¥13.3b more liquid assets than total liabilities.
This surplus strongly suggests that TravelSky Technology has a rock-solid balance sheet (and the debt is of no concern whatsoever). 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.
View our latest analysis for TravelSky Technology
On top of that, TravelSky Technology grew its EBIT by 57% over the last twelve months, and that growth will make it easier to handle its debt. 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 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. 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 recorded free cash flow worth a fulsome 86% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.
Summing Up
While it is always sensible to investigate a company's debt, in this case TravelSky Technology has CN¥11.6b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of CN¥2.5b, being 86% of its EBIT. The bottom line is that TravelSky Technology's use of debt is absolutely fine. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TravelSky Technology's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.