AIMA Technology Group (SHSE:603529) Has A Pretty Healthy Balance Sheet

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.' 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. Importantly, AIMA Technology Group CO., LTD (SHSE:603529) does carry debt. But should shareholders be worried about its use of debt?

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. 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. 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.

See our latest analysis for AIMA Technology Group

How Much Debt Does AIMA Technology Group Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 AIMA Technology Group had CN¥1.78b of debt, an increase on CN¥1.62b, over one year. However, its balance sheet shows it holds CN¥8.23b in cash, so it actually has CN¥6.44b net cash.

A Look At AIMA Technology Group's Liabilities

Zooming in on the latest balance sheet data, we can see that AIMA Technology Group had liabilities of CN¥12.8b due within 12 months and liabilities of CN¥2.25b due beyond that. On the other hand, it had cash of CN¥8.23b and CN¥505.1m worth of receivables due within a year. So it has liabilities totalling CN¥6.33b more than its cash and near-term receivables, combined.

Given AIMA Technology Group has a market capitalization of CN¥34.1b, 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. Despite its noteworthy liabilities, AIMA Technology Group boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that AIMA Technology Group saw its EBIT decline by 5.8% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AIMA Technology Group's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. AIMA Technology Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, AIMA Technology Group actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While AIMA Technology Group does have more liabilities than liquid assets, it also has net cash of CN¥6.44b. The cherry on top was that in converted 102% of that EBIT to free cash flow, bringing in -CN¥1.0b. So we are not troubled with AIMA Technology Group's debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example - AIMA Technology Group has 1 warning sign we think you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.