Here's Why Shanghai Aerospace Automobile Electromechanical (SHSE:600151) Can Afford Some 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.' 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. As with many other companies Shanghai Aerospace Automobile Electromechanical Co., Ltd. (SHSE:600151) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Shanghai Aerospace Automobile Electromechanical

How Much Debt Does Shanghai Aerospace Automobile Electromechanical Carry?

As you can see below, Shanghai Aerospace Automobile Electromechanical had CN¥1.40b of debt at March 2024, down from CN¥1.52b a year prior. On the flip side, it has CN¥1.37b in cash leading to net debt of about CN¥31.0m.

How Healthy Is Shanghai Aerospace Automobile Electromechanical's Balance Sheet?

According to the last reported balance sheet, Shanghai Aerospace Automobile Electromechanical had liabilities of CN¥4.00b due within 12 months, and liabilities of CN¥1.38b due beyond 12 months. On the other hand, it had cash of CN¥1.37b and CN¥2.16b worth of receivables due within a year. So it has liabilities totalling CN¥1.86b more than its cash and near-term receivables, combined.

Shanghai Aerospace Automobile Electromechanical has a market capitalization of CN¥6.98b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. But either way, Shanghai Aerospace Automobile Electromechanical has virtually no net debt, 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 you can't view debt in total isolation; since Shanghai Aerospace Automobile Electromechanical 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.

Over 12 months, Shanghai Aerospace Automobile Electromechanical made a loss at the EBIT level, and saw its revenue drop to CN¥8.3b, which is a fall of 10%. We would much prefer see growth.

Caveat Emptor

Not only did Shanghai Aerospace Automobile Electromechanical's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at CN¥249m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. We would feel better if it turned its trailing twelve month loss of CN¥450m into a profit. So we do think this stock is quite risky. For riskier companies like Shanghai Aerospace Automobile Electromechanical 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.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.