Is Tianneng Battery Group (SHSE:688819) A Risky Investment?

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.' 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. Importantly, Tianneng Battery Group Co., Ltd. (SHSE:688819) does carry debt. But the more important question is: how much risk is that debt creating?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Tianneng Battery Group

What Is Tianneng Battery Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Tianneng Battery Group had CN¥9.76b of debt, an increase on CN¥7.54b, over one year. However, its balance sheet shows it holds CN¥18.4b in cash, so it actually has CN¥8.67b net cash.

A Look At Tianneng Battery Group's Liabilities

We can see from the most recent balance sheet that Tianneng Battery Group had liabilities of CN¥23.0b falling due within a year, and liabilities of CN¥4.08b due beyond that. Offsetting this, it had CN¥18.4b in cash and CN¥3.68b in receivables that were due within 12 months. So it has liabilities totalling CN¥4.95b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tianneng Battery Group is worth CN¥22.8b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Tianneng Battery Group boasts net cash, so it's fair to say it does not have a heavy debt load!

The modesty of its debt load may become crucial for Tianneng Battery Group if management cannot prevent a repeat of the 34% cut to EBIT over the last year. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. 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 Tianneng Battery Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tianneng Battery 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. During the last three years, Tianneng Battery Group generated free cash flow amounting to a very robust 85% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While Tianneng Battery Group does have more liabilities than liquid assets, it also has net cash of CN¥8.67b. And it impressed us with free cash flow of CN¥1.0b, being 85% of its EBIT. So we are not troubled with Tianneng Battery Group's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 2 warning signs we've spotted with Tianneng Battery Group .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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