Is TCL Electronics Holdings (HKG:1070) Weighed On By Its Debt Load?

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 TCL Electronics Holdings Limited (HKG:1070) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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

How Much Debt Does TCL Electronics Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that TCL Electronics Holdings had HK$5.44b of debt in June 2023, down from HK$7.26b, one year before. But on the other hand it also has HK$7.99b in cash, leading to a HK$2.55b net cash position.

How Healthy Is TCL Electronics Holdings' Balance Sheet?

According to the last reported balance sheet, TCL Electronics Holdings had liabilities of HK$41.1b due within 12 months, and liabilities of HK$1.60b due beyond 12 months. On the other hand, it had cash of HK$7.99b and HK$16.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$18.5b.

The deficiency here weighs heavily on the HK$6.90b 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. 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. There's no doubt that we learn most about debt from the balance sheet. 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 saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

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$461m. 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. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for TCL Electronics Holdings that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.