Is CNTEE Transelectrica (BVB:TEL) Using Debt In A Risky Way?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies CNTEE Transelectrica SA (BVB:TEL) makes use of debt. But should shareholders be worried about its use of debt?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for CNTEE Transelectrica

What Is CNTEE Transelectrica's Debt?

The image below, which you can click on for greater detail, shows that at June 2022 CNTEE Transelectrica had debt of RON233.9m, up from RON124.6m in one year. However, it also had RON124.6m in cash, and so its net debt is RON109.3m.

How Healthy Is CNTEE Transelectrica's Balance Sheet?

We can see from the most recent balance sheet that CNTEE Transelectrica had liabilities of RON2.93b falling due within a year, and liabilities of RON722.3m due beyond that. On the other hand, it had cash of RON124.6m and RON2.26b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by RON1.27b.

This is a mountain of leverage relative to its market capitalization of RON1.50b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, CNTEE Transelectrica reported revenue of RON5.0b, which is a gain of 82%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

While we can certainly appreciate CNTEE Transelectrica's revenue growth, its earnings before interest and tax (EBIT) loss is not ideal. Indeed, it lost RON63m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through RON481m of cash over the last year. So in short it's a really risky stock. 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 - CNTEE Transelectrica has 1 warning sign we think you should be aware of.

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.

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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.