Is TCL Electronics Holdings (HKG:1070) Using Debt Sensibly?

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.' 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?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for TCL Electronics Holdings

What Is TCL Electronics Holdings's Debt?

As you can see below, TCL Electronics Holdings had HK$7.26b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$9.09b in cash, leading to a HK$1.83b net cash position.

How Healthy Is TCL Electronics Holdings' Balance Sheet?

The latest balance sheet data shows that TCL Electronics Holdings had liabilities of HK$39.6b due within a year, and liabilities of HK$1.78b falling due after that. On the other hand, it had cash of HK$9.09b and HK$12.4b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$20.0b.

The deficiency here weighs heavily on the HK$7.62b 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. Given that TCL Electronics Holdings has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 TCL Electronics Holdings 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.

Over 12 months, TCL Electronics Holdings reported revenue of HK$74b, which is a gain of 7.1%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

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$392m. 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for TCL Electronics Holdings (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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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.