Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital. 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. As with many other companies Tianneng Power International Limited (HKG:819) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tianneng Power International

How Much Debt Does Tianneng Power International Carry?

As you can see below, Tianneng Power International had CN¥1.91b of debt at December 2019, down from CN¥2.70b a year prior. However, its balance sheet shows it holds CN¥6.22b in cash, so it actually has CN¥4.30b net cash.

How Strong Is Tianneng Power International's Balance Sheet?

We can see from the most recent balance sheet that Tianneng Power International had liabilities of CN¥11.1b falling due within a year, and liabilities of CN¥771.5m due beyond that. On the other hand, it had cash of CN¥6.22b and CN¥1.03b worth of receivables due within a year. So its liabilities total CN¥4.60b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥7.51b, so it does suggest shareholders should keep an eye on Tianneng Power International's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, Tianneng Power International also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that Tianneng Power International has boosted its EBIT by 41%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tianneng Power International 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.