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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, TCL Electronics Holdings Limited (HKG:1070) does carry debt. But the more important question is: how much risk is that debt creating?
When Is Debt Dangerous?
Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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. 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.
How Much Debt Does TCL Electronics Holdings Carry?
You can click the graphic below for the historical numbers, but it shows that TCL Electronics Holdings had HK$4.61b of debt in December 2024, down from HK$5.81b, one year before. However, it does have HK$11.6b in cash offsetting this, leading to net cash of HK$7.02b.
How Healthy Is TCL Electronics Holdings' Balance Sheet?
The latest balance sheet data shows that TCL Electronics Holdings had liabilities of HK$57.1b due within a year, and liabilities of HK$1.56b falling due after that. Offsetting these obligations, it had cash of HK$11.6b as well as receivables valued at HK$26.9b due within 12 months. So it has liabilities totalling HK$20.1b more than its cash and near-term receivables, combined.
This deficit is considerable relative to its market capitalization of HK$20.4b, so it does suggest shareholders should keep an eye on TCL Electronics Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, TCL Electronics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!
View our latest analysis for TCL Electronics Holdings
Pleasingly, TCL Electronics Holdings is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 853% gain in the last twelve months. 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.
Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. TCL Electronics Holdings 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. Over the most recent two years, TCL Electronics Holdings recorded free cash flow worth 66% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.
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$7.02b. And we liked the look of last year's 853% year-on-year EBIT growth. So we don't have any problem with TCL Electronics Holdings's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with TCL Electronics Holdings , 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.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.