David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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 note that Tanac Automation Co., Ltd. (SZSE:300461) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt A Problem?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for Tanac Automation
What Is Tanac Automation's Debt?
You can click the graphic below for the historical numbers, but it shows that as of September 2023 Tanac Automation had CN¥43.0m of debt, an increase on CN¥29.0m, over one year. However, its balance sheet shows it holds CN¥253.1m in cash, so it actually has CN¥210.1m net cash.
How Strong Is Tanac Automation's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Tanac Automation had liabilities of CN¥142.6m due within 12 months and liabilities of CN¥73.5m due beyond that. Offsetting these obligations, it had cash of CN¥253.1m as well as receivables valued at CN¥142.1m due within 12 months. So it actually has CN¥179.2m more liquid assets than total liabilities.
This surplus suggests that Tanac Automation has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, Tanac Automation 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 it is Tanac Automation'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.
Over 12 months, Tanac Automation saw its revenue hold pretty steady, and it did not report positive earnings before interest and tax. While that's not too bad, we'd prefer see growth.
So How Risky Is Tanac Automation?
By their very nature companies that are losing money are more risky than those with a long history of profitability. And in the last year Tanac Automation had an earnings before interest and tax (EBIT) loss, truth be told. And over the same period it saw negative free cash outflow of CN¥152m and booked a CN¥21m accounting loss. Given it only has net cash of CN¥210.1m, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 2 warning signs for Tanac Automation (1 is a bit unpleasant!) that you should be aware of before investing here.
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.