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.' 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. As with many other companies Anhui Tongguan Copper Foil Group Co., Ltd. (SZSE:301217) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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, 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Anhui Tongguan Copper Foil Group's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Anhui Tongguan Copper Foil Group had debt of CN¥732.3m, up from CN¥198.1m in one year. However, its balance sheet shows it holds CN¥1.54b in cash, so it actually has CN¥805.9m 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¥1.17b due within a year, and liabilities of CN¥416.8m falling due after that. Offsetting this, it had CN¥1.54b in cash and CN¥1.74b in receivables that were due within 12 months. So it can boast CN¥1.70b more liquid assets than total liabilities.

It's good to see that Anhui Tongguan Copper Foil Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. 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! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anhui Tongguan Copper Foil Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Anhui Tongguan Copper Foil Group saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.

So How Risky Is Anhui Tongguan Copper Foil Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. 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. And over the same period it saw negative free cash outflow of CN¥992m and booked a CN¥36m accounting loss. With only CN¥805.9m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Anhui Tongguan Copper Foil Group you should know about.

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.