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. As with many other companies Tongda Group Holdings Limited (HKG:698) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we think about a company's use of debt, we first look at cash and debt together.

How Much Debt Does Tongda Group Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that Tongda Group Holdings had HK$919.9m of debt in June 2024, down from HK$2.76b, one year before. However, its balance sheet shows it holds HK$996.7m in cash, so it actually has HK$76.8m net cash.

How Strong Is Tongda Group Holdings' Balance Sheet?

The latest balance sheet data shows that Tongda Group Holdings had liabilities of HK$3.14b due within a year, and liabilities of HK$520.3m falling due after that. Offsetting these obligations, it had cash of HK$996.7m as well as receivables valued at HK$2.30b due within 12 months. So it has liabilities totalling HK$362.1m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Tongda Group Holdings has a market capitalization of HK$1.19b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. Despite its noteworthy liabilities, Tongda Group Holdings boasts net cash, so it's fair to say it does not have a heavy debt load! 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 Tongda Group 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, Tongda Group Holdings made a loss at the EBIT level, and saw its revenue drop to HK$6.5b, which is a fall of 5.4%. That's not what we would hope to see.

So How Risky Is Tongda Group Holdings?

While Tongda Group Holdings lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow HK$27m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. For riskier companies like Tongda Group Holdings I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.