Is CNTEE Transelectrica (BVB:TEL) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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, CNTEE Transelectrica SA (BVB:TEL) does carry debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for CNTEE Transelectrica

How Much Debt Does CNTEE Transelectrica Carry?

As you can see below, CNTEE Transelectrica had RON49.4m of debt at June 2024, down from RON79.2m a year prior. However, its balance sheet shows it holds RON541.4m in cash, so it actually has RON492.0m net cash.

How Strong Is CNTEE Transelectrica's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CNTEE Transelectrica had liabilities of RON3.45b due within 12 months and liabilities of RON946.9m due beyond that. Offsetting this, it had RON541.4m in cash and RON3.08b in receivables that were due within 12 months. So it has liabilities totalling RON779.4m more than its cash and near-term receivables, combined.

CNTEE Transelectrica has a market capitalization of RON3.09b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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.

The modesty of its debt load may become crucial for CNTEE Transelectrica if management cannot prevent a repeat of the 56% cut to EBIT over the last year. Falling earnings (if the trend continues) could eventually make even modest debt quite risky. There's no doubt that we learn most about debt from the balance sheet. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. 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 two years, CNTEE Transelectrica recorded free cash flow of 50% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While CNTEE Transelectrica does have more liabilities than liquid assets, it also has net cash of RON492.0m. So we don't have any problem with CNTEE Transelectrica's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 1 warning sign with CNTEE Transelectrica , and understanding them should be part of your investment process.

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.