Tatwah SmartechLtd (SZSE:002512) Is Making Moderate Use 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.' 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, Tatwah Smartech Co.,Ltd. (SZSE:002512) does carry 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. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Tatwah SmartechLtd

What Is Tatwah SmartechLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that Tatwah SmartechLtd had CN¥339.4m of debt in September 2024, down from CN¥731.5m, one year before. On the flip side, it has CN¥60.4m in cash leading to net debt of about CN¥278.9m.

A Look At Tatwah SmartechLtd's Liabilities

According to the last reported balance sheet, Tatwah SmartechLtd had liabilities of CN¥1.71b due within 12 months, and liabilities of CN¥470.9m due beyond 12 months. Offsetting these obligations, it had cash of CN¥60.4m as well as receivables valued at CN¥348.0m due within 12 months. So its liabilities total CN¥1.78b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Tatwah SmartechLtd has a market capitalization of CN¥5.03b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. 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¥1.9b, which is a fall of 5.8%. We would much prefer see growth.

Caveat Emptor

Importantly, Tatwah SmartechLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥92m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥169m of cash over the last year. So suffice it to say we do consider the stock to be risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 Tatwah SmartechLtd (including 2 which shouldn't be ignored) .

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.