Is Anhui Tongguan Copper Foil Group (SZSE:301217) A Risky Investment?

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 can see that Anhui Tongguan Copper Foil Group Co., Ltd. (SZSE:301217) does use debt in its business. But the more important question is: how much risk is that debt creating?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that at September 2024 Anhui Tongguan Copper Foil Group had debt of CN¥778.8m, up from CN¥530.5m in one year. But on the other hand it also has CN¥1.31b in cash, leading to a CN¥532.2m net cash position.

A Look At Anhui Tongguan Copper Foil Group's Liabilities

We can see from the most recent balance sheet that Anhui Tongguan Copper Foil Group had liabilities of CN¥1.27b falling due within a year, and liabilities of CN¥416.7m due beyond that. Offsetting these obligations, it had cash of CN¥1.31b as well as receivables valued at CN¥1.80b due within 12 months. So it can boast CN¥1.43b more liquid assets than total liabilities.

This surplus suggests that Anhui Tongguan Copper Foil Group has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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 ultimately the future profitability of the business will decide if Anhui Tongguan Copper Foil Group 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, Anhui Tongguan Copper Foil Group reported revenue of CN¥4.2b, which is a gain of 8.6%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Anhui Tongguan Copper Foil Group?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Anhui Tongguan Copper Foil Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥707m of cash and made a loss of CN¥89m. With only CN¥532.2m on the balance sheet, it would appear that its going to need to raise capital again soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example - Anhui Tongguan Copper Foil Group has 1 warning sign we think you should be aware of.

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.