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.' 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. We note that Tianli Lithium Energy Group Co., Ltd. (SZSE:301152) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tianli Lithium Energy Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tianli Lithium Energy Group had CN¥953.0m of debt in September 2024, down from CN¥1.03b, one year before. However, it also had CN¥247.6m in cash, and so its net debt is CN¥705.4m.

A Look At Tianli Lithium Energy Group's Liabilities

The latest balance sheet data shows that Tianli Lithium Energy Group had liabilities of CN¥1.26b due within a year, and liabilities of CN¥123.0m falling due after that. On the other hand, it had cash of CN¥247.6m and CN¥952.9m worth of receivables due within a year. So its liabilities total CN¥181.4m more than the combination of its cash and short-term receivables.

Since publicly traded Tianli Lithium Energy Group shares are worth a total of CN¥5.49b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But it is Tianli Lithium Energy Group'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, Tianli Lithium Energy Group made a loss at the EBIT level, and saw its revenue drop to CN¥1.9b, which is a fall of 30%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Tianli Lithium Energy Group'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¥517m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥537m in negative free cash flow over the last twelve months. So in short it's a really 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. We've identified 3 warning signs with Tianli Lithium Energy Group , and understanding them should be part of your investment process.

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.