Is Tonze New Energy TechnologyLtd (SZSE:002759) Weighed On By Its Debt Load?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, Tonze New Energy Technology Co.,Ltd. (SZSE:002759) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

See our latest analysis for Tonze New Energy TechnologyLtd

How Much Debt Does Tonze New Energy TechnologyLtd Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Tonze New Energy TechnologyLtd had debt of CN¥744.2m, up from CN¥585.0m in one year. But it also has CN¥979.0m in cash to offset that, meaning it has CN¥234.8m net cash.

A Look At Tonze New Energy TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Tonze New Energy TechnologyLtd had liabilities of CN¥1.98b due within 12 months and liabilities of CN¥407.3m due beyond that. Offsetting this, it had CN¥979.0m in cash and CN¥935.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥469.4m.

Given Tonze New Energy TechnologyLtd has a market capitalization of CN¥4.56b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, Tonze New Energy TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is Tonze New Energy TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tonze New Energy TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥2.0b. That makes us nervous, to say the least.

So How Risky Is Tonze New Energy TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Tonze New Energy TechnologyLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥761m of cash and made a loss of CN¥178m. Given it only has net cash of CN¥234.8m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. 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. Be aware that Tonze New Energy TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.