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. Importantly, Anhui Tongguan Copper Foil Group Co., Ltd. (SZSE:301217) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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. When we examine debt levels, we first consider both cash and debt levels, together.

How Much Debt Does Anhui Tongguan Copper Foil Group Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui Tongguan Copper Foil Group had debt of CN¥778.8m, up from CN¥530.5m in one year. But it also has CN¥1.31b in cash to offset that, meaning it has CN¥532.2m net cash.

A Look At Anhui Tongguan Copper Foil Group's Liabilities

We can see from the most recent balance sheet that Anhui Tongguan Copper Foil Group had liabilities of CN¥1.27b falling due within a year, and liabilities of CN¥416.7m due beyond that. On the other hand, it had cash of CN¥1.31b and CN¥1.80b worth of receivables due within a year. So it actually has CN¥1.43b more liquid assets than total liabilities.

This surplus suggests that Anhui Tongguan Copper Foil Group is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Anhui Tongguan Copper Foil Group wasn't profitable at an EBIT level, but managed to grow its revenue by 8.6%, to CN¥4.2b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Anhui Tongguan Copper Foil Group?

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 Anhui Tongguan Copper Foil Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥707m of cash and made a loss of CN¥89m. Given it only has net cash of CN¥532.2m, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should be aware of the 2 warning signs we've spotted with Anhui Tongguan Copper Foil Group .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.