Does Anhui Tatfook Technology (SZSE:300134) Have A Healthy Balance Sheet?

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.' 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. We can see that Anhui Tatfook Technology Co., Ltd (SZSE:300134) does use debt in its business. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Anhui Tatfook Technology

What Is Anhui Tatfook Technology's Net Debt?

As you can see below, at the end of September 2023, Anhui Tatfook Technology had CN¥700.7m of debt, up from CN¥598.6m a year ago. Click the image for more detail. However, it does have CN¥859.0m in cash offsetting this, leading to net cash of CN¥158.3m.

A Look At Anhui Tatfook Technology's Liabilities

We can see from the most recent balance sheet that Anhui Tatfook Technology had liabilities of CN¥1.30b falling due within a year, and liabilities of CN¥457.2m due beyond that. Offsetting these obligations, it had cash of CN¥859.0m as well as receivables valued at CN¥793.9m due within 12 months. So it has liabilities totalling CN¥104.9m more than its cash and near-term receivables, combined.

Having regard to Anhui Tatfook Technology's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥6.43b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Anhui Tatfook Technology 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 you can't view debt in total isolation; since Anhui Tatfook Technology 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.

In the last year Anhui Tatfook Technology had a loss before interest and tax, and actually shrunk its revenue by 12%, to CN¥2.4b. We would much prefer see growth.

So How Risky Is Anhui Tatfook Technology?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And we do note that Anhui Tatfook Technology had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥450m of cash and made a loss of CN¥2.0m. But at least it has CN¥158.3m on the balance sheet to spend on growth, near-term. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Anhui Tatfook Technology's profit, revenue, and operating cashflow have changed over the last few years.

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.