Anhui Tongfeng Electronics (SHSE:600237) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, Anhui Tongfeng Electronics Company Limited (SHSE:600237) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

See our latest analysis for Anhui Tongfeng Electronics

What Is Anhui Tongfeng Electronics's Debt?

As you can see below, Anhui Tongfeng Electronics had CN¥58.1m of debt at September 2024, down from CN¥181.1m a year prior. However, it does have CN¥618.7m in cash offsetting this, leading to net cash of CN¥560.6m.

How Healthy Is Anhui Tongfeng Electronics' Balance Sheet?

According to the last reported balance sheet, Anhui Tongfeng Electronics had liabilities of CN¥516.4m due within 12 months, and liabilities of CN¥31.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥618.7m as well as receivables valued at CN¥557.9m due within 12 months. So it actually has CN¥628.3m more liquid assets than total liabilities.

This surplus suggests that Anhui Tongfeng Electronics is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Anhui Tongfeng Electronics boasts net cash, so it's fair to say it does not have a heavy debt load!

Also positive, Anhui Tongfeng Electronics grew its EBIT by 23% in the last year, and that should make it easier to pay down debt, going forward. 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 Tongfeng Electronics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Anhui Tongfeng Electronics may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Anhui Tongfeng Electronics created free cash flow amounting to 2.2% of its EBIT, an uninspiring performance. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Anhui Tongfeng Electronics has net cash of CN¥560.6m, as well as more liquid assets than liabilities. And we liked the look of last year's 23% year-on-year EBIT growth. So is Anhui Tongfeng Electronics's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in Anhui Tongfeng Electronics, you may well want to click here to check an interactive graph of its earnings per share history.

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.