Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Tianneng Battery Group Co., Ltd. (SHSE:688819) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Tianneng Battery Group's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Tianneng Battery Group had debt of CN¥10.2b, up from CN¥7.63b in one year. However, it does have CN¥18.2b in cash offsetting this, leading to net cash of CN¥7.97b.

How Strong Is Tianneng Battery Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Tianneng Battery Group had liabilities of CN¥25.1b due within 12 months and liabilities of CN¥4.16b due beyond that. Offsetting these obligations, it had cash of CN¥18.2b as well as receivables valued at CN¥4.70b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥6.32b.

While this might seem like a lot, it is not so bad since Tianneng Battery Group has a market capitalization of CN¥27.6b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, Tianneng Battery Group boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, Tianneng Battery Group's EBIT dived 20%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Tianneng Battery Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tianneng Battery Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Looking at the most recent three years, Tianneng Battery Group recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While Tianneng Battery Group does have more liabilities than liquid assets, it also has net cash of CN¥7.97b. So we don't have any problem with Tianneng Battery Group's use of debt. 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. Case in point: We've spotted 1 warning sign for Tianneng Battery Group you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.