Does Tatwah SmartechLtd (SZSE:002512) Have A Healthy Balance Sheet?

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.' 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. As with many other companies Tatwah Smartech Co.,Ltd. (SZSE:002512) makes use of debt. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 Tatwah SmartechLtd

What Is Tatwah SmartechLtd's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Tatwah SmartechLtd had debt of CN¥990.0m, up from CN¥669.0m in one year. However, because it has a cash reserve of CN¥92.5m, its net debt is less, at about CN¥897.5m.

A Look At Tatwah SmartechLtd's Liabilities

We can see from the most recent balance sheet that Tatwah SmartechLtd had liabilities of CN¥2.03b falling due within a year, and liabilities of CN¥1.20b due beyond that. Offsetting these obligations, it had cash of CN¥92.5m as well as receivables valued at CN¥371.0m due within 12 months. So it has liabilities totalling CN¥2.77b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥3.79b, so it does suggest shareholders should keep an eye on Tatwah SmartechLtd's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Tatwah SmartechLtd will need earnings to service that debt. 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.

Over 12 months, Tatwah SmartechLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.7b, which is a fall of 19%. We would much prefer see growth.

Caveat Emptor

Not only did Tatwah SmartechLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥80m. 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¥835m in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. 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. To that end, you should be aware of the 1 warning sign we've spotted with Tatwah SmartechLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.