Is Anhui Tatfook Technology (SZSE:300134) Weighed On By Its Debt Load?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Anhui Tatfook Technology Co., Ltd (SZSE:300134) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. 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

How Much Debt Does Anhui Tatfook Technology Carry?

You can click the graphic below for the historical numbers, but it shows that Anhui Tatfook Technology had CN¥575.0m of debt in September 2024, down from CN¥700.7m, one year before. However, its balance sheet shows it holds CN¥666.3m in cash, so it actually has CN¥91.3m net cash.

How Strong Is Anhui Tatfook Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Anhui Tatfook Technology had liabilities of CN¥1.22b due within 12 months and liabilities of CN¥369.6m due beyond that. Offsetting this, it had CN¥666.3m in cash and CN¥642.6m in receivables that were due within 12 months. So its liabilities total CN¥276.5m more than the combination of its cash and short-term receivables.

Given Anhui Tatfook Technology has a market capitalization of CN¥9.72b, 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. While it does have liabilities worth noting, Anhui Tatfook Technology also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 2.7%, to CN¥2.4b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Anhui Tatfook Technology?

Although Anhui Tatfook Technology had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥11m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Anhui Tatfook Technology you should know about.

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.