We Think Tanac Automation (SZSE:300461) Has A Fair Chunk Of Debt

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Tanac Automation Co., Ltd. (SZSE:300461) does have debt on its balance sheet. 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tanac Automation

How Much Debt Does Tanac Automation Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Tanac Automation had CN¥87.6m of debt, an increase on CN¥43.0m, over one year. However, it does have CN¥53.5m in cash offsetting this, leading to net debt of about CN¥34.1m.

How Healthy Is Tanac Automation's Balance Sheet?

We can see from the most recent balance sheet that Tanac Automation had liabilities of CN¥294.2m falling due within a year, and liabilities of CN¥56.2m due beyond that. Offsetting these obligations, it had cash of CN¥53.5m as well as receivables valued at CN¥193.6m due within 12 months. So its liabilities total CN¥103.4m more than the combination of its cash and short-term receivables.

Since publicly traded Tanac Automation shares are worth a total of CN¥3.66b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. But either way, Tanac Automation has virtually no net debt, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Tanac Automation's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year Tanac Automation wasn't profitable at an EBIT level, but managed to grow its revenue by 6.9%, to CN¥260m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Tanac Automation had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥15m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. Another cause for caution is that is bled CN¥70m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. To that end, you should learn about the 2 warning signs we've spotted with Tanac Automation (including 1 which makes us a bit uncomfortable) .

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.