These 4 Measures Indicate That AIMA Technology Group (SHSE:603529) Is Using Debt Safely

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We can see that AIMA Technology Group CO., LTD (SHSE:603529) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AIMA Technology Group

What Is AIMA Technology Group's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2023 AIMA Technology Group had debt of CN¥1.62b, up from none in one year. However, it does have CN¥11.7b in cash offsetting this, leading to net cash of CN¥10.0b.

How Healthy Is AIMA Technology Group's Balance Sheet?

We can see from the most recent balance sheet that AIMA Technology Group had liabilities of CN¥12.8b falling due within a year, and liabilities of CN¥1.89b due beyond that. Offsetting these obligations, it had cash of CN¥11.7b as well as receivables valued at CN¥673.7m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.32b.

Given AIMA Technology Group has a market capitalization of CN¥27.4b, 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!

On top of that, AIMA Technology Group grew its EBIT by 32% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. 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're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AIMA Technology Group 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. Happily for any shareholders, AIMA Technology Group actually produced more free cash flow than EBIT over the last three years. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

We could understand if investors are concerned about AIMA Technology Group's liabilities, but we can be reassured by the fact it has has net cash of CN¥10.0b. The cherry on top was that in converted 187% of that EBIT to free cash flow, bringing in CN¥702m. So we don't think AIMA Technology Group's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - AIMA Technology Group has 1 warning sign we think you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.