Here's Why Tianneng Power International (HKG:819) Can Manage Its Debt Responsibly

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Tianneng Power International Limited (HKG:819) makes use of debt. But the real question is whether this debt is making the company risky.

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. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tianneng Power International

What Is Tianneng Power International's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 Tianneng Power International had CN¥6.18b of debt, an increase on CN¥4.28b, over one year. However, its balance sheet shows it holds CN¥9.13b in cash, so it actually has CN¥2.95b net cash.

How Strong Is Tianneng Power International's Balance Sheet?

The latest balance sheet data shows that Tianneng Power International had liabilities of CN¥20.4b due within a year, and liabilities of CN¥2.60b falling due after that. Offsetting these obligations, it had cash of CN¥9.13b as well as receivables valued at CN¥5.37b due within 12 months. So its liabilities total CN¥8.47b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥10.7b, so it does suggest shareholders should keep an eye on Tianneng Power International's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, Tianneng Power International also has more cash than debt, so we're pretty confident it can manage its debt safely.

Even more impressive was the fact that Tianneng Power International grew its EBIT by 101% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. 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 Power International can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Tianneng Power International 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. Over the last three years, Tianneng Power International recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

While Tianneng Power International does have more liabilities than liquid assets, it also has net cash of CN¥2.95b. And it impressed us with its EBIT growth of 101% over the last year. So we are not troubled with Tianneng Power International's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Tianneng Power International is showing 2 warning signs in our investment analysis , and 1 of those is concerning...

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.