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

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.' 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. Importantly, TCL Electronics Holdings Limited (HKG:1070) does carry debt. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for TCL Electronics Holdings

How Much Debt Does TCL Electronics Holdings Carry?

As you can see below, TCL Electronics Holdings had HK$5.46b of debt at December 2022, down from HK$6.88b a year prior. However, it does have HK$10.7b in cash offsetting this, leading to net cash of HK$5.19b.

How Strong Is TCL Electronics Holdings' Balance Sheet?

We can see from the most recent balance sheet that TCL Electronics Holdings had liabilities of HK$36.5b falling due within a year, and liabilities of HK$1.69b due beyond that. Offsetting this, it had HK$10.7b in cash and HK$13.3b in receivables that were due within 12 months. So its liabilities total HK$14.2b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the HK$8.70b 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 definitely think shareholders need to watch this one closely. 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. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if TCL Electronics Holdings 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.

In the last year TCL Electronics Holdings had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to HK$71b. We would much prefer see growth.

So How Risky Is TCL Electronics Holdings?

Although TCL Electronics Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$447m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. The balance sheet is clearly the area to focus on when you are analysing debt. 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 , you should know about...

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.