Does CNTEE Transelectrica (BVB:TEL) 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.' 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, CNTEE Transelectrica SA (BVB:TEL) does carry debt. But the more important question is: how much risk is that debt creating?

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When Is Debt Dangerous?

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. 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 think about a company's use of debt, we first look at cash and debt together.

What Is CNTEE Transelectrica's Net Debt?

The image below, which you can click on for greater detail, shows that CNTEE Transelectrica had debt of RON32.2m at the end of December 2024, a reduction from RON63.5m over a year. However, its balance sheet shows it holds RON671.6m in cash, so it actually has RON639.4m net cash.

A Look At CNTEE Transelectrica's Liabilities

We can see from the most recent balance sheet that CNTEE Transelectrica had liabilities of RON3.98b falling due within a year, and liabilities of RON862.8m due beyond that. Offsetting these obligations, it had cash of RON671.6m as well as receivables valued at RON3.79b due within 12 months. So its liabilities total RON388.0m more than the combination of its cash and short-term receivables.

Since publicly traded CNTEE Transelectrica shares are worth a total of RON2.90b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CNTEE Transelectrica also has more cash than debt, so we're pretty confident it can manage its debt safely.

View our latest analysis for CNTEE Transelectrica

Better yet, CNTEE Transelectrica grew its EBIT by 142% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CNTEE Transelectrica's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CNTEE Transelectrica may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, CNTEE Transelectrica recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

Although CNTEE Transelectrica's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of RON639.4m. And it impressed us with its EBIT growth of 142% over the last year. So we don't think CNTEE Transelectrica's use of debt is risky. Over time, share prices tend to follow earnings per share, so if you're interested in CNTEE Transelectrica, you may well want to click here to check an interactive graph of its earnings per share history .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.