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 Tatfook Technology Co., Ltd (SZSE:300134) does carry debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Anhui Tatfook Technology's Net Debt?

As you can see below, at the end of March 2024, Anhui Tatfook Technology had CN¥625.3m of debt, up from CN¥548.2m a year ago. Click the image for more detail. However, it does have CN¥927.3m in cash offsetting this, leading to net cash of CN¥301.9m.

How Strong Is Anhui Tatfook Technology's Balance Sheet?

We can see from the most recent balance sheet that Anhui Tatfook Technology had liabilities of CN¥1.25b falling due within a year, and liabilities of CN¥421.8m due beyond that. Offsetting this, it had CN¥927.3m in cash and CN¥643.0m in receivables that were due within 12 months. So it has liabilities totalling CN¥104.5m more than its cash and near-term receivables, combined.

Having regard to Anhui Tatfook Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥5.64b company is short on cash, but still worth keeping an eye on the balance sheet. 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. 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 Tatfook Technology will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Anhui Tatfook Technology made a loss at the EBIT level, and saw its revenue drop to CN¥2.5b, which is a fall of 3.7%. That's not what we would hope to see.

So How Risky Is Anhui Tatfook Technology?

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 Tatfook Technology lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of CN¥149m and booked a CN¥211m accounting loss. But the saving grace is the CN¥301.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. 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.

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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