Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Tunghsu Optoelectronic Technology Co., Ltd. (SZSE:200413) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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.

See our latest analysis for Tunghsu Optoelectronic Technology

What Is Tunghsu Optoelectronic Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that Tunghsu Optoelectronic Technology had CN¥20.9b of debt in March 2023, down from CN¥21.9b, one year before. However, it also had CN¥8.85b in cash, and so its net debt is CN¥12.1b.

How Strong Is Tunghsu Optoelectronic Technology's Balance Sheet?

We can see from the most recent balance sheet that Tunghsu Optoelectronic Technology had liabilities of CN¥33.7b falling due within a year, and liabilities of CN¥1.74b due beyond that. On the other hand, it had cash of CN¥8.85b and CN¥10.1b worth of receivables due within a year. So it has liabilities totalling CN¥16.5b more than its cash and near-term receivables, combined.

This deficit casts a shadow over the CN¥9.69b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Tunghsu Optoelectronic Technology would probably need a major re-capitalization if its creditors were to demand repayment. 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 if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Tunghsu Optoelectronic Technology saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Tunghsu Optoelectronic Technology had an earnings before interest and tax (EBIT) loss over the last year. Its EBIT loss was a whopping CN¥1.9b. When we look at that alongside the significant liabilities, we're not particularly confident 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¥1.4b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Tunghsu Optoelectronic Technology is showing 1 warning sign in our investment analysis , you should know about...

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.