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, Tunghsu Optoelectronic Technology Co., Ltd. (SZSE:200413) does carry 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. 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, 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.

View our latest analysis for Tunghsu Optoelectronic Technology

What Is Tunghsu Optoelectronic Technology's Debt?

As you can see below, at the end of March 2022, Tunghsu Optoelectronic Technology had CN¥21.9b of debt, up from CN¥20.7b a year ago. Click the image for more detail. However, it also had CN¥9.24b in cash, and so its net debt is CN¥12.7b.

A Look At Tunghsu Optoelectronic Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that Tunghsu Optoelectronic Technology had liabilities of CN¥33.7b due within 12 months and liabilities of CN¥3.18b due beyond that. Offsetting this, it had CN¥9.24b in cash and CN¥11.6b in receivables that were due within 12 months. So its liabilities total CN¥16.0b more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the CN¥10.5b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Tunghsu Optoelectronic Technology would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But it is Tunghsu Optoelectronic Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Tunghsu Optoelectronic Technology made a loss at the EBIT level, and saw its revenue drop to CN¥5.8b, which is a fall of 20%. That makes us nervous, to say the least.

Caveat Emptor

While Tunghsu Optoelectronic Technology's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥1.6b. Considering that alongside the liabilities mentioned above make us nervous about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥2.9b. And until that time we think this is a 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, we've discovered 2 warning signs for Tunghsu Optoelectronic Technology (1 shouldn't be ignored!) that you should be aware of before investing here.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.