Is TCL Zhonghuan Renewable Energy TechnologyLtd (SZSE:002129) Using Debt Sensibly?

Warren Buffett famously said, '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. As with many other companies TCL Zhonghuan Renewable Energy Technology Co.,Ltd. (SZSE:002129) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TCL Zhonghuan Renewable Energy TechnologyLtd

What Is TCL Zhonghuan Renewable Energy TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 TCL Zhonghuan Renewable Energy TechnologyLtd had debt of CN¥47.7b, up from CN¥41.6b in one year. On the flip side, it has CN¥16.9b in cash leading to net debt of about CN¥30.8b.

A Look At TCL Zhonghuan Renewable Energy TechnologyLtd's Liabilities

The latest balance sheet data shows that TCL Zhonghuan Renewable Energy TechnologyLtd had liabilities of CN¥27.3b due within a year, and liabilities of CN¥50.1b falling due after that. Offsetting this, it had CN¥16.9b in cash and CN¥8.50b in receivables that were due within 12 months. So it has liabilities totalling CN¥52.0b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's CN¥36.2b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. 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 TCL Zhonghuan Renewable Energy TechnologyLtd 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, TCL Zhonghuan Renewable Energy TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥33b, which is a fall of 50%. 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). Its EBIT loss was a whopping CN¥5.5b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥3.7b in negative free cash flow over the last year. That means it's on the risky side of things. 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. For example, we've discovered 2 warning signs for TCL Zhonghuan Renewable Energy TechnologyLtd that you should be aware of before investing here.

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.