Here's Why Tianneng Power International (HKG:819) Has A Meaningful Debt Burden

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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Tianneng Power International Limited (HKG:819) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tianneng Power International

How Much Debt Does Tianneng Power International Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Tianneng Power International had CN¥11.3b of debt, an increase on CN¥7.62b, over one year. But on the other hand it also has CN¥13.0b in cash, leading to a CN¥1.66b net cash position.

How Healthy Is Tianneng Power International's Balance Sheet?

According to the last reported balance sheet, Tianneng Power International had liabilities of CN¥27.2b due within 12 months, and liabilities of CN¥2.40b due beyond 12 months. Offsetting this, it had CN¥13.0b in cash and CN¥5.57b in receivables that were due within 12 months. So its liabilities total CN¥11.1b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥6.61b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Tianneng Power International would likely require a major re-capitalisation if it had to pay its creditors today. Tianneng Power International boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.

In addition to that, we're happy to report that Tianneng Power International has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tianneng Power International'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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. 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 saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

Although Tianneng Power International's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥1.66b. And we liked the look of last year's 87% year-on-year EBIT growth. Despite its cash we think that Tianneng Power International seems to struggle to handle its total liabilities, so we are wary of the stock. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tianneng Power International 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.