Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Tonze New Energy Technology Co.,Ltd. (SZSE:002759) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tonze New Energy TechnologyLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Tonze New Energy TechnologyLtd had CN¥744.2m of debt, an increase on CN¥585.0m, over one year. However, its balance sheet shows it holds CN¥979.0m in cash, so it actually has CN¥234.8m net cash.

How Strong Is Tonze New Energy TechnologyLtd's Balance Sheet?

The latest balance sheet data shows that Tonze New Energy TechnologyLtd had liabilities of CN¥1.98b due within a year, and liabilities of CN¥407.3m falling due after that. Offsetting these obligations, it had cash of CN¥979.0m as well as receivables valued at CN¥935.7m due within 12 months. So its liabilities total CN¥469.4m more than the combination of its cash and short-term receivables.

Since publicly traded Tonze New Energy TechnologyLtd shares are worth a total of CN¥5.13b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Tonze New Energy TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But it is Tonze New Energy TechnologyLtd'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 Tonze New Energy TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 21%, to CN¥2.0b. That makes us nervous, to say the least.

So How Risky Is Tonze New Energy TechnologyLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Tonze New Energy TechnologyLtd lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥761m of cash and made a loss of CN¥178m. With only CN¥234.8m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Tonze New Energy TechnologyLtd (of which 1 can't be ignored!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.