TripAdvisor (TRIP) has been on an aggressive expansion spree, especially with its instant booking rollout. It has been investing heavily in the business, as can be seen by the heavily increasing cost structure discussed earlier in this series.
Despite this, TripAdvisor has managed to keep its debt in check. In fact, it has been reducing its debt for the past 16 quarters. As a result, the total debt on TRIP’s balance sheet has decreased from $288 million at the end of 3Q15 to $96 million at the end of 3Q16.
Thus, the company’s total debt-to-EBITDA[1. earnings before interest, tax, depreciation, and amortization] ratio has also decreased from 0.71x at the end of 3Q15 to 0.4x at the end of 3Q16.
TripAdvisor’s net debt-to-EBITDA ratio has been improving in the last five quarters. Its net debt-to-EBITDA ratio increased from -1.1x at the end of 3Q15 to approximately -3.2x at the end of 3Q16.
TripAdvisor’s rival Expedia (EXPE) has also maintained constant debt since 4Q15. However, due to improving EBITDA, EXPE’s net debt-to-EBITDA ratio has improved to 0.9x at the end of 3Q16.
Cash flow decline is worrisome
Strong cash flows have certainly helped fund many of these investments. However, this fell 31% in 3Q16.
At the end of 3Q16, TRIP’s cash on the balance sheet was ~$611 million, which is lower than the ~$891 million at the end of 2Q16, mainly due to the decline of cash flow from operations (or CFO). TripAdvisor’s CFO totaled -$87 million in 3Q16, which is lower than its $238 million earned in 2Q16 and $10 million earned in 2Q15.
Why is decreasing leverage good?
High leverage and interest costs reduce TripAdvisor’s ability to cope with unfavorable conditions, thus increasing its risk. In times of such growth uncertainty, TRIP’s decreasing leverage is a positive trend and should help reduce volatility in the stock’s valuation multiple.
TRIP makes up 1.6% of the First Trust NASDAQ-100 Ex-Tech Sect ETF (QQXT).