Does TCL Electronics Holdings (HKG:1070) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 Electronics Holdings Limited (HKG:1070) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for TCL Electronics Holdings

What Is TCL Electronics Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2021 TCL Electronics Holdings had HK$6.88b of debt, an increase on HK$5.45b, over one year. But on the other hand it also has HK$12.9b in cash, leading to a HK$5.97b net cash position.

How Healthy Is TCL Electronics Holdings' Balance Sheet?

We can see from the most recent balance sheet that TCL Electronics Holdings had liabilities of HK$39.9b falling due within a year, and liabilities of HK$1.22b due beyond that. On the other hand, it had cash of HK$12.9b and HK$13.7b worth of receivables due within a year. So its liabilities total HK$14.6b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$8.56b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, TCL Electronics Holdings would probably need a major re-capitalization if its creditors were to demand repayment. TCL Electronics Holdings 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. 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 TCL Electronics Holdings's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year TCL Electronics Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 47%, to HK$75b. With any luck the company will be able to grow its way to profitability.

So How Risky Is TCL Electronics Holdings?

While TCL Electronics Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$1.2b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive was the revenue growth of 47% over the last year. But we genuinely do think the balance sheet is a risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that TCL Electronics Holdings is showing 3 warning signs in our investment analysis , and 1 of those shouldn't be ignored...

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.