Here's Why Tonking New Energy Group Holdings (HKG:8326) Can Afford Some Debt

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tonking New Energy Group Holdings Limited (HKG:8326) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Tonking New Energy Group Holdings

How Much Debt Does Tonking New Energy Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2021 Tonking New Energy Group Holdings had HK$89.6m of debt, an increase on HK$71.5m, over one year. However, it also had HK$67.7m in cash, and so its net debt is HK$21.9m.

How Healthy Is Tonking New Energy Group Holdings' Balance Sheet?

According to the last reported balance sheet, Tonking New Energy Group Holdings had liabilities of HK$172.2m due within 12 months, and liabilities of HK$13.7m due beyond 12 months. Offsetting this, it had HK$67.7m in cash and HK$257.7m in receivables that were due within 12 months. So it can boast HK$139.5m more liquid assets than total liabilities.

This surplus strongly suggests that Tonking New Energy Group Holdings has a rock-solid balance sheet (and the debt is of no concern whatsoever). On this view, lenders should feel as safe as the beloved of a black-belt karate master. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tonking New Energy Group Holdings's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Tonking New Energy Group Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 23%, to HK$262m. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Tonking New Energy Group Holdings still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at HK$351k. Having said that, the balance sheet has plenty of liquid assets for now. That will give the company some time and space to grow and develop its business as need be. While the stock is probably a bit risky, there may be an opportunity if the business itself improves, allowing the company to stage a recovery. 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. Be aware that Tonking New Energy Group Holdings is showing 3 warning signs in our investment analysis , and 1 of those is a bit unpleasant...

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.