Is Anhui Tatfook Technology (SZSE:300134) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, Anhui Tatfook Technology Co., Ltd (SZSE:300134) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Anhui Tatfook Technology

What Is Anhui Tatfook Technology's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Anhui Tatfook Technology had debt of CN¥625.3m, up from CN¥548.2m in one year. But it also has CN¥927.3m in cash to offset that, meaning it has CN¥301.9m net cash.

How Strong Is Anhui Tatfook Technology's Balance Sheet?

The latest balance sheet data shows that Anhui Tatfook Technology had liabilities of CN¥1.25b due within a year, and liabilities of CN¥421.8m falling due after that. On the other hand, it had cash of CN¥927.3m and CN¥643.0m worth of receivables due within a year. So it has liabilities totalling CN¥104.5m more than its cash and near-term receivables, combined.

Given Anhui Tatfook Technology has a market capitalization of CN¥5.14b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Anhui Tatfook Technology boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Anhui Tatfook Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Anhui Tatfook Technology had a loss before interest and tax, and actually shrunk its revenue by 3.7%, to CN¥2.5b. That's not what we would hope to see.

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. And over the same period it saw negative free cash outflow of CN¥149m and booked a CN¥211m accounting loss. But the saving grace is the CN¥301.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. For riskier companies like Anhui Tatfook Technology I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

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