Is Tonking New Energy Group Holdings (HKG:8326) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, Tonking New Energy Group Holdings Limited (HKG:8326) does carry debt. But the real question is whether this debt is making the company risky.

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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 examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tonking New Energy Group Holdings

How Much Debt Does Tonking New Energy Group Holdings Carry?

As you can see below, at the end of September 2021, Tonking New Energy Group Holdings had HK$28.6m of debt, up from HK$27.1m a year ago. Click the image for more detail. But it also has HK$67.7m in cash to offset that, meaning it has HK$39.1m net cash.

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

We can see from the most recent balance sheet that Tonking New Energy Group Holdings had liabilities of HK$172.2m falling due within a year, and liabilities of HK$13.7m due beyond that. On the other hand, it had cash of HK$67.7m and HK$257.7m worth of receivables due within a year. So it can boast HK$139.5m more liquid assets than total liabilities.

This excess liquidity is a great indication that Tonking New Energy Group Holdings' balance sheet is almost as strong as Fort Knox. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Simply put, the fact that Tonking New Energy Group Holdings has more cash than debt is arguably a good indication that it can manage its debt safely. 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.

Over 12 months, Tonking New Energy Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$277m, which is a fall of 16%. That's not what we would hope to see.

So How Risky Is Tonking New Energy Group Holdings?

While Tonking New Energy Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of HK$6.8m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The next few years will be important as the business matures. 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 3 warning signs for Tonking New Energy Group Holdings (1 is a bit concerning!) that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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.

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