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, Anhui Tatfook Technology Co., Ltd (SZSE:300134) does carry debt. But the more important question is: how much risk is that debt creating?

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. 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.

How Much Debt Does Anhui Tatfook Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Anhui Tatfook Technology had CN¥625.3m of debt, an increase on CN¥548.2m, over one year. However, it does have CN¥927.3m in cash offsetting this, leading to net cash of CN¥301.9m.

How Healthy Is Anhui Tatfook Technology's Balance Sheet?

We can see from the most recent balance sheet that Anhui Tatfook Technology had liabilities of CN¥1.25b falling due within a year, and liabilities of CN¥421.8m due beyond that. Offsetting this, it had CN¥927.3m in cash and CN¥643.0m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥104.5m.

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¥5.79b company is short on cash, but still worth keeping an eye on the balance sheet. 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. There's no doubt that we learn most about debt from the balance sheet. But it is Anhui Tatfook Technology's earnings that will influence how the balance sheet holds up in the future. 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. We would much prefer see growth.

So How Risky Is Anhui Tatfook Technology?

Statistically speaking companies that lose money are riskier than those that make money. And the fact is that over the last twelve months Anhui Tatfook Technology lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through CN¥149m of cash and made a loss of CN¥211m. While this does make the company a bit risky, it's important to remember it has net cash of CN¥301.9m. That means it could keep spending at its current rate for more than two years. 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.