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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Trip.com Group Limited (NASDAQ:TCOM) does use debt in its business. 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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 Trip.com Group

What Is Trip.com Group's Debt?

The image below, which you can click on for greater detail, shows that Trip.com Group had debt of CN¥45.7b at the end of September 2024, a reduction from CN¥50.5b over a year. But on the other hand it also has CN¥76.3b in cash, leading to a CN¥30.6b net cash position.

How Strong Is Trip.com Group's Balance Sheet?

According to the last reported balance sheet, Trip.com Group had liabilities of CN¥80.4b due within 12 months, and liabilities of CN¥23.7b due beyond 12 months. Offsetting this, it had CN¥76.3b in cash and CN¥13.8b in receivables that were due within 12 months. So its liabilities total CN¥14.0b more than the combination of its cash and short-term receivables.

Of course, Trip.com Group has a titanic market capitalization of CN¥335.4b, 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. Despite its noteworthy liabilities, Trip.com Group boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Trip.com Group has boosted its EBIT by 58%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Trip.com Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Trip.com Group 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 two years, Trip.com Group actually produced more free cash flow than EBIT. 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 it is always sensible to look at a company's total liabilities, it is very reassuring that Trip.com Group has CN¥30.6b in net cash. And it impressed us with free cash flow of CN¥21b, being 162% of its EBIT. So we don't think Trip.com Group's use of debt is risky. 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 Trip.com Group's earnings per share history for free.

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.

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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.