Is Tanwan (HKG:9890) Using Too Much Debt?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Tanwan Inc. (HKG:9890) does carry debt. But should shareholders be worried about its use of debt?

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When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

What Is Tanwan's Debt?

The image below, which you can click on for greater detail, shows that Tanwan had debt of CN¥1.09b at the end of June 2025, a reduction from CN¥2.38b over a year. However, it does have CN¥1.75b in cash offsetting this, leading to net cash of CN¥664.0m.

How Strong Is Tanwan's Balance Sheet?

We can see from the most recent balance sheet that Tanwan had liabilities of CN¥2.39b falling due within a year, and liabilities of CN¥42.8m due beyond that. Offsetting these obligations, it had cash of CN¥1.75b as well as receivables valued at CN¥279.4m due within 12 months. So it has liabilities totalling CN¥400.9m more than its cash and near-term receivables, combined.

Since publicly traded Tanwan shares are worth a total of CN¥6.73b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, Tanwan boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Tanwan

It was also good to see that despite losing money on the EBIT line last year, Tanwan turned things around in the last 12 months, delivering and EBIT of CN¥743m. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Tanwan 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tanwan has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last year, Tanwan saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Tanwan's liabilities, but we can be reassured by the fact it has has net cash of CN¥664.0m. So we are not troubled with Tanwan's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for Tanwan 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.