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. We can see that Tech-Bank Food Co., Ltd. (SZSE:002124) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 Tech-Bank Food's Net Debt?

The image below, which you can click on for greater detail, shows that Tech-Bank Food had debt of CN¥3.88b at the end of September 2024, a reduction from CN¥4.67b over a year. However, it also had CN¥112.2m in cash, and so its net debt is CN¥3.77b.

How Strong Is Tech-Bank Food's Balance Sheet?

The latest balance sheet data shows that Tech-Bank Food had liabilities of CN¥8.06b due within a year, and liabilities of CN¥2.18b falling due after that. Offsetting these obligations, it had cash of CN¥112.2m as well as receivables valued at CN¥71.9m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥10.1b.

This deficit casts a shadow over the CN¥6.47b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Tech-Bank Food would likely require a major re-capitalisation if it had to pay its creditors today. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Tech-Bank Food can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Over 12 months, Tech-Bank Food saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Tech-Bank Food had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost a very considerable CN¥974m at the EBIT level. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. Not least because it burned through CN¥1.9b in negative free cash flow over the last year. So suffice it to say we consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example Tech-Bank Food has 3 warning signs (and 2 which don't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.