TongweiLtd (SHSE:600438) Is Carrying A Fair Bit Of Debt

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Tongwei Co.,Ltd (SHSE:600438) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for TongweiLtd

What Is TongweiLtd's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 TongweiLtd had debt of CN¥71.6b, up from CN¥38.7b in one year. However, it also had CN¥31.1b in cash, and so its net debt is CN¥40.5b.

How Healthy Is TongweiLtd's Balance Sheet?

According to the last reported balance sheet, TongweiLtd had liabilities of CN¥63.8b due within 12 months, and liabilities of CN¥72.9b due beyond 12 months. On the other hand, it had cash of CN¥31.1b and CN¥19.9b worth of receivables due within a year. So its liabilities total CN¥85.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its very significant market capitalization of CN¥118.9b, so it does suggest shareholders should keep an eye on TongweiLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TongweiLtd 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.

Over 12 months, TongweiLtd made a loss at the EBIT level, and saw its revenue drop to CN¥96b, which is a fall of 37%. That makes us nervous, to say the least.

Caveat Emptor

Not only did TongweiLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥587m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥28b of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TongweiLtd is showing 2 warning signs in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.