Anhui Tongguan Copper Foil Group (SZSE:301217) Has Debt But No Earnings; Should You Worry?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that Anhui Tongguan Copper Foil Group Co., Ltd. (SZSE:301217) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Anhui Tongguan Copper Foil Group

What Is Anhui Tongguan Copper Foil Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Anhui Tongguan Copper Foil Group had CN¥530.5m of debt, an increase on CN¥106.0m, over one year. But it also has CN¥1.81b in cash to offset that, meaning it has CN¥1.28b net cash.

How Strong Is Anhui Tongguan Copper Foil Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Tongguan Copper Foil Group had liabilities of CN¥759.0m due within 12 months and liabilities of CN¥393.6m due beyond that. On the other hand, it had cash of CN¥1.81b and CN¥1.50b worth of receivables due within a year. So it actually has CN¥2.16b more liquid assets than total liabilities.

It's good to see that Anhui Tongguan Copper Foil Group has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Anhui Tongguan Copper Foil Group boasts net cash, 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 future earnings, more than anything, that will determine Anhui Tongguan Copper Foil Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Anhui Tongguan Copper Foil Group wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to CN¥3.9b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Anhui Tongguan Copper Foil Group?

While Anhui Tongguan Copper Foil Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥43m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 3 warning signs we've spotted with Anhui Tongguan Copper Foil Group (including 2 which shouldn't be ignored) .

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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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.