Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 Tatfook Technology Co., Ltd (SZSE:300134) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Anhui Tatfook Technology's Net Debt?

The image below, which you can click on for greater detail, shows that Anhui Tatfook Technology had debt of CN¥575.0m at the end of September 2024, a reduction from CN¥700.7m over a year. But on the other hand it also has CN¥666.3m in cash, leading to a CN¥91.3m net cash position.

A Look At Anhui Tatfook Technology's Liabilities

We can see from the most recent balance sheet that Anhui Tatfook Technology had liabilities of CN¥1.22b falling due within a year, and liabilities of CN¥369.6m due beyond that. Offsetting this, it had CN¥666.3m in cash and CN¥642.6m in receivables that were due within 12 months. So it has liabilities totalling CN¥276.5m more than its cash and near-term receivables, combined.

Of course, Anhui Tatfook Technology has a market capitalization of CN¥11.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Anhui Tatfook Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Anhui Tatfook Technology 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 Tatfook Technology reported revenue of CN¥2.4b, which is a gain of 2.7%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Anhui Tatfook Technology?

While Anhui Tatfook Technology lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥11m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with Anhui Tatfook Technology .

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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