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, Tangel Culture Co., Ltd. (SZSE:300148) does carry 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tangel Culture's Debt?

As you can see below, at the end of September 2024, Tangel Culture had CN¥92.6m of debt, up from CN¥85.0m a year ago. Click the image for more detail. But it also has CN¥391.2m in cash to offset that, meaning it has CN¥298.6m net cash.

How Strong Is Tangel Culture's Balance Sheet?

We can see from the most recent balance sheet that Tangel Culture had liabilities of CN¥117.1m falling due within a year, and liabilities of CN¥156.4m due beyond that. Offsetting these obligations, it had cash of CN¥391.2m as well as receivables valued at CN¥33.8m due within 12 months. So it actually has CN¥151.5m more liquid assets than total liabilities.

This surplus suggests that Tangel Culture has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tangel Culture has more cash than debt is arguably a good indication that it can manage its debt safely.

It was also good to see that despite losing money on the EBIT line last year, Tangel Culture turned things around in the last 12 months, delivering and EBIT of CN¥1.5m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tangel Culture 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Tangel Culture may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last year, Tangel Culture saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case Tangel Culture has CN¥298.6m in net cash and a decent-looking balance sheet. So we don't have any problem with Tangel Culture's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. We've identified 1 warning sign with Tangel Culture , and understanding them should be part of your investment process.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.