Is TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. We can see that TCL Zhonghuan Renewable Energy Technology Co.,Ltd. (SZSE:002129) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for TCL Zhonghuan Renewable Energy TechnologyLtd

How Much Debt Does TCL Zhonghuan Renewable Energy TechnologyLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 TCL Zhonghuan Renewable Energy TechnologyLtd had CN¥43.8b of debt, an increase on CN¥38.5b, over one year. However, it does have CN¥13.7b in cash offsetting this, leading to net debt of about CN¥30.2b.

How Strong Is TCL Zhonghuan Renewable Energy TechnologyLtd's Balance Sheet?

We can see from the most recent balance sheet that TCL Zhonghuan Renewable Energy TechnologyLtd had liabilities of CN¥22.7b falling due within a year, and liabilities of CN¥46.5b due beyond that. Offsetting this, it had CN¥13.7b in cash and CN¥10.1b in receivables that were due within 12 months. So its liabilities total CN¥45.5b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥47.8b, so it does suggest shareholders should keep an eye on TCL Zhonghuan Renewable Energy TechnologyLtd'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 it is future earnings, more than anything, that will determine TCL Zhonghuan Renewable Energy TechnologyLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year TCL Zhonghuan Renewable Energy TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 42%, to CN¥40b. That makes us nervous, to say the least.

Caveat Emptor

Not only did TCL Zhonghuan Renewable Energy TechnologyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥1.5b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥5.5b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for TCL Zhonghuan Renewable Energy TechnologyLtd you should know about.

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.