Tianneng Power International (HKG:819) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Tianneng Power International Limited (HKG:819) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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 Tianneng Power International

What Is Tianneng Power International's Debt?

As you can see below, Tianneng Power International had CN¥1.64b of debt at December 2020, down from CN¥1.91b a year prior. But it also has CN¥7.10b in cash to offset that, meaning it has CN¥5.46b net cash.

A Look At Tianneng Power International's Liabilities

The latest balance sheet data shows that Tianneng Power International had liabilities of CN¥12.4b due within a year, and liabilities of CN¥1.31b falling due after that. On the other hand, it had cash of CN¥7.10b and CN¥1.40b worth of receivables due within a year. So its liabilities total CN¥5.24b more than the combination of its cash and short-term receivables.

Tianneng Power International has a market capitalization of CN¥12.3b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

Also positive, Tianneng Power International grew its EBIT by 27% in the last year, and that should make it easier to pay down debt, going forward. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. During the last three years, Tianneng Power International produced sturdy free cash flow equating to 51% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

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¥5.46b. And it impressed us with its EBIT growth of 27% over the last year. So we are not troubled with Tianneng Power International's debt use. 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. Case in point: We've spotted 3 warning signs for Tianneng Power International you should be aware of, and 1 of them is potentially serious.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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