Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 can see that TCL Electronics Holdings Limited (HKG:1070) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for TCL Electronics Holdings

What Is TCL Electronics Holdings's Net Debt?

As you can see below, TCL Electronics Holdings had HK$7.26b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds HK$9.09b in cash, so it actually has HK$1.83b net cash.

How Healthy Is TCL Electronics Holdings' Balance Sheet?

The latest balance sheet data shows that TCL Electronics Holdings had liabilities of HK$39.6b due within a year, and liabilities of HK$1.78b falling due after that. Offsetting these obligations, it had cash of HK$9.09b as well as receivables valued at HK$12.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$20.0b.

This deficit casts a shadow over the HK$7.85b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, TCL Electronics Holdings would probably need a major re-capitalization if its creditors were to demand repayment. TCL Electronics Holdings boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if TCL Electronics Holdings can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year TCL Electronics Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 7.1%, to HK$74b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is TCL Electronics Holdings?

Although TCL Electronics Holdings had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of HK$392m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 5 warning signs for TCL Electronics Holdings you should be aware of, and 1 of them is significant.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.