The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that Tunghsu Azure Renewable Energy Co.,Ltd. (SZSE:000040) does use debt in its business. But is this debt a concern to shareholders?
Why Does Debt Bring Risk?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, 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 step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Tunghsu Azure Renewable EnergyLtd
What Is Tunghsu Azure Renewable EnergyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that Tunghsu Azure Renewable EnergyLtd had debt of CN¥7.76b at the end of September 2023, a reduction from CN¥8.42b over a year. On the flip side, it has CN¥3.19b in cash leading to net debt of about CN¥4.57b.
A Look At Tunghsu Azure Renewable EnergyLtd's Liabilities
Zooming in on the latest balance sheet data, we can see that Tunghsu Azure Renewable EnergyLtd had liabilities of CN¥9.06b due within 12 months and liabilities of CN¥4.11b due beyond that. Offsetting this, it had CN¥3.19b in cash and CN¥4.34b in receivables that were due within 12 months. So its liabilities total CN¥5.64b more than the combination of its cash and short-term receivables.
Given this deficit is actually higher than the company's market capitalization of CN¥5.28b, we think shareholders really should watch Tunghsu Azure Renewable EnergyLtd's debt levels, like a parent watching their child ride a bike for the first time. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Tunghsu Azure Renewable EnergyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
In the last year Tunghsu Azure Renewable EnergyLtd had a loss before interest and tax, and actually shrunk its revenue by 52%, to CN¥1.8b. To be frank that doesn't bode well.
Caveat Emptor
Not only did Tunghsu Azure Renewable EnergyLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥14m. 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¥95m. In the meantime, we consider the stock to be risky. 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. For instance, we've identified 1 warning sign for Tunghsu Azure Renewable EnergyLtd that you should be aware of.
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.