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.' 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. We note that Anhui Tatfook Technology Co., Ltd (SZSE:300134) does have debt on its balance sheet. 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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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?

As you can see below, Anhui Tatfook Technology had CN¥617.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. However, its balance sheet shows it holds CN¥859.0m in cash, so it actually has CN¥242.0m net cash.

How Healthy Is Anhui Tatfook Technology's Balance Sheet?

According to the last reported balance sheet, Anhui Tatfook Technology had liabilities of CN¥1.30b due within 12 months, and liabilities of CN¥457.2m due beyond 12 months. Offsetting these obligations, it had cash of CN¥859.0m as well as receivables valued at CN¥793.9m due within 12 months. So it has liabilities totalling CN¥104.9m more than its cash and near-term receivables, combined.

Of course, Anhui Tatfook Technology has a market capitalization of CN¥5.17b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Anhui Tatfook Technology 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 Anhui Tatfook Technology's earnings that will influence how the balance sheet holds up in the future. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥2.4b, which is a fall of 12%. We would much prefer see growth.

So How Risky Is Anhui Tatfook Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Anhui Tatfook Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥450m of cash and made a loss of CN¥2.0m. However, it has net cash of CN¥242.0m, so it has a bit of time before it will need more capital. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Anhui Tatfook Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.