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.' 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. Importantly, TCL Electronics Holdings Limited (HKG:1070) does carry debt. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
Check out our latest analysis for TCL Electronics Holdings
What Is TCL Electronics Holdings's Net Debt?
You can click the graphic below for the historical numbers, but it shows that as of June 2024 TCL Electronics Holdings had HK$6.65b of debt, an increase on HK$5.44b, over one year. However, it does have HK$10.4b in cash offsetting this, leading to net cash of HK$3.74b.
A Look At TCL Electronics Holdings' Liabilities
The latest balance sheet data shows that TCL Electronics Holdings had liabilities of HK$52.6b due within a year, and liabilities of HK$1.51b falling due after that. Offsetting this, it had HK$10.4b in cash and HK$20.1b in receivables that were due within 12 months. So its liabilities total HK$23.6b more than the combination of its cash and short-term receivables.
The deficiency here weighs heavily on the HK$15.7b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, TCL Electronics Holdings would likely require a major re-capitalisation if it had to pay its creditors today. TCL Electronics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total.
We also note that TCL Electronics Holdings improved its EBIT from a last year's loss to a positive HK$691m. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine TCL Electronics Holdings'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.
But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While TCL Electronics Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, TCL Electronics Holdings actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.
Summing Up
Although TCL Electronics Holdings's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of HK$3.74b. The cherry on top was that in converted 203% of that EBIT to free cash flow, bringing in HK$1.4b. So while TCL Electronics Holdings does not have a great balance sheet, it's certainly not too bad. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of TCL Electronics Holdings's earnings per share history for free.
If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.
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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.