Would Tatwah SmartechLtd (SZSE:002512) Be Better Off With Less Debt?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 can see that Tatwah Smartech Co.,Ltd. (SZSE:002512) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Tatwah SmartechLtd

How Much Debt Does Tatwah SmartechLtd Carry?

As you can see below, at the end of September 2023, Tatwah SmartechLtd had CN¥731.5m of debt, up from CN¥565.8m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥179.6m, its net debt is less, at about CN¥551.9m.

How Strong Is Tatwah SmartechLtd's Balance Sheet?

The latest balance sheet data shows that Tatwah SmartechLtd had liabilities of CN¥2.16b due within a year, and liabilities of CN¥945.7m falling due after that. Offsetting these obligations, it had cash of CN¥179.6m as well as receivables valued at CN¥696.7m due within 12 months. So it has liabilities totalling CN¥2.23b more than its cash and near-term receivables, combined.

This deficit isn't so bad because Tatwah SmartechLtd is worth CN¥4.99b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. 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 reported revenue of CN¥2.0b, which is a gain of 35%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Tatwah SmartechLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥50m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥1.5b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example Tatwah SmartechLtd has 2 warning signs (and 1 which is significant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.