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Liberty TripAdvisor Holdings (NASDAQ:LTRP.A) Takes On Some Risk With Its Use Of Debt

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Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Liberty TripAdvisor Holdings, Inc. (NASDAQ:LTRP.A) 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?

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. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Liberty TripAdvisor Holdings

How Much Debt Does Liberty TripAdvisor Holdings Carry?

As you can see below, at the end of March 2020, Liberty TripAdvisor Holdings had US$573.0m of debt, up from US$490.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds US$812.0m in cash, so it actually has US$239.0m net cash.

debt-equity-history-analysis
debt-equity-history-analysis

How Healthy Is Liberty TripAdvisor Holdings's Balance Sheet?

According to the last reported balance sheet, Liberty TripAdvisor Holdings had liabilities of US$316.0m due within 12 months, and liabilities of US$1.37b due beyond 12 months. Offsetting these obligations, it had cash of US$812.0m as well as receivables valued at US$159.0m due within 12 months. So its liabilities total US$717.0m more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the US$319.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Liberty TripAdvisor Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Liberty TripAdvisor Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

In fact Liberty TripAdvisor Holdings's saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Liberty TripAdvisor Holdings's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Liberty TripAdvisor Holdings 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. Happily for any shareholders, Liberty TripAdvisor Holdings actually produced more free cash flow than EBIT over the last three years. 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 Liberty TripAdvisor Holdings does have more liabilities than liquid assets, it also has net cash of US$239.0m. And it impressed us with free cash flow of US$42m, being 260% of its EBIT. Despite its cash we think that Liberty TripAdvisor Holdings seems to struggle to handle its total liabilities, so we are wary of the stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Liberty TripAdvisor Holdings (1 is potentially serious) you should be aware of.

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.

This article by Simply Wall St is general in nature. 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.