Tripadvisor (NASDAQ:TRIP) is quite indebted

Legendary fund manager Li Lu (whom Charlie Munger once backed) once said, “The greatest risk in investing is not price volatility, but whether you will suffer a permanent loss of capital. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. Like many other companies Tripadvisor, Inc. (NASDAQ:TRIP) uses debt. But does this debt worry shareholders?

When is debt dangerous?

Generally speaking, debt only becomes a real problem when a company cannot easily repay it, either by raising capital or with its own cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. However, a more frequent (but still costly) event is when a company has to issue shares at bargain prices, permanently diluting shareholders, just to shore up its balance sheet. That said, the most common situation is when a company manages its debt reasonably well – and to its own benefit. When we look at debt levels, we first consider cash and debt levels, together.

See our latest analysis for Tripadvisor

What is Tripadvisor’s debt?

As you can see below, Tripadvisor had $834.0 million in debt as of March 2022, about the same as the previous year. You can click on the graph for more details. However, he also had $781.0 million in cash, so his net debt is $53.0 million.

NasdaqGS: TRIP Debt to Equity History June 17, 2022

How healthy is Tripadvisor’s balance sheet?

The latest balance sheet data shows that Tripadvisor had debts of US$467.0 million due within one year, and debts of US$1.14 billion falling due thereafter. In return, it had $781.0 million in cash and $229.0 million in receivables due within 12 months. It therefore has liabilities totaling $595.0 million more than its cash and short-term receivables, combined.

While that might sound like a lot, it’s not too bad since Tripadvisor has a market capitalization of US$2.55 billion, so it could probably bolster its balance sheet by raising capital if needed. But it is clear that it is essential to examine closely whether it can manage its debt without dilution. There is no doubt that we learn the most about debt from the balance sheet. But it’s future revenue, more than anything, that will determine Tripadvisor’s ability to maintain a healthy balance sheet in the future. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Year-over-year, Tripadvisor reported revenue of $1.0 billion, a 132% gain, although it reported no earnings before interest and taxes. Its fairly obvious shareholders therefore hope for more growth!

Caveat Emptor

Even though Tripadvisor has managed to grow its revenue quite slickly, the harsh truth is that it is losing money on the EBIT line. To be precise, the EBIT loss amounted to 67 million US dollars. When we look at this and recall the liabilities on its balance sheet, versus cash, it seems unwise to us that the company has liabilities. So we think its balance sheet is a little stretched, but not beyond repair. For example, we wouldn’t want to see a repeat of last year’s US$102 million loss. In short, it’s a really risky title. There is no doubt that we learn the most about debt from the balance sheet. However, not all investment risks reside on the balance sheet, far from it. To this end, you should be aware of the 1 warning sign we spotted with Tripadvisor.

In the end, sometimes it’s easier to focus on companies that don’t even need to take on debt. Readers can access a list of growth stocks with no net debt 100% freeat present.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.

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