Warren Buffett famously said, ‘Volatility is far from synonymous with risk.’ 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 is this debt a concern to shareholders?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of ‘creative destruction’ where failed businesses are mercilessly liquidated by their bankers. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company’s use of debt, we first look at cash and debt together.
Check out our latest analysis for TCL Electronics Holdings
What Is TCL Electronics Holdings’s Net Debt?
As you can see below, TCL Electronics Holdings had HK$7.26b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has HK$9.09b in cash, leading to a HK$1.83b net cash position.
How Strong Is TCL Electronics Holdings’ Balance Sheet?
Zooming in on the latest balance sheet data, we can see that TCL Electronics Holdings had liabilities of HK$39.6b due within 12 months and liabilities of HK$1.78b due beyond that. Offsetting this, it had HK$9.09b in cash and HK$12.4b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$20.0b.
The deficiency here weighs heavily on the HK$7.85b 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’d watch its balance sheet closely, without a doubt. At the end of the day, TCL Electronics Holdings would probably need a major re-capitalization if its creditors were to demand repayment. Given that TCL Electronics Holdings has more cash than debt, we’re pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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 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.
Over 12 months, TCL Electronics Holdings reported revenue of HK$74b, which is a gain of 7.1%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.
So How Risky Is TCL Electronics Holdings?
Although TCL Electronics Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$392m. So when you consider it has net cash, along with the statutory profit, the stock probably isn’t as risky as it might seem, at least in the short term. We’re not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet – far from it. These risks can be hard to spot. Every company has them, and we’ve spotted 5 warning signs for TCL Electronics Holdings (of which 1 is significant!) you should know about.
If, after all that, you’re more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
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