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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Anhui Tongguan Copper Foil Group Co., Ltd. (SZSE:301217) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Anhui Tongguan Copper Foil Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Anhui Tongguan Copper Foil Group had CN¥530.5m of debt, an increase on CN¥106.0m, over one year. However, its balance sheet shows it holds CN¥1.81b in cash, so it actually has CN¥1.28b net cash.

How Healthy Is Anhui Tongguan Copper Foil Group's Balance Sheet?

The latest balance sheet data shows that Anhui Tongguan Copper Foil Group had liabilities of CN¥759.0m due within a year, and liabilities of CN¥393.6m falling due after that. On the other hand, it had cash of CN¥1.81b and CN¥1.50b worth of receivables due within a year. So it actually has CN¥2.16b more liquid assets than total liabilities.

This excess liquidity suggests that Anhui Tongguan Copper Foil Group is taking a careful approach to debt. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Anhui Tongguan Copper Foil Group 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 future earnings, more than anything, that will determine Anhui Tongguan Copper Foil Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Anhui Tongguan Copper Foil Group wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to CN¥3.9b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Anhui Tongguan Copper Foil Group?

Although Anhui Tongguan Copper Foil Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥43m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. We've identified 3 warning signs with Anhui Tongguan Copper Foil Group (at least 2 which are a bit concerning) , and understanding them should be part of your investment process.

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.