Aerospace Hi-Tech Holding Group (SZSE:000901) Is Making Moderate Use Of Debt

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. We note that Aerospace Hi-Tech Holding Group Co., Ltd. (SZSE:000901) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Aerospace Hi-Tech Holding Group

What Is Aerospace Hi-Tech Holding Group's Net Debt?

As you can see below, Aerospace Hi-Tech Holding Group had CN¥781.0m of debt at September 2024, down from CN¥898.1m a year prior. However, because it has a cash reserve of CN¥744.6m, its net debt is less, at about CN¥36.4m.

A Look At Aerospace Hi-Tech Holding Group's Liabilities

We can see from the most recent balance sheet that Aerospace Hi-Tech Holding Group had liabilities of CN¥2.68b falling due within a year, and liabilities of CN¥1.48b due beyond that. Offsetting this, it had CN¥744.6m in cash and CN¥2.08b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥1.34b.

Of course, Aerospace Hi-Tech Holding Group has a market capitalization of CN¥9.54b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Aerospace Hi-Tech Holding Group has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But it is Aerospace Hi-Tech Holding Group'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, Aerospace Hi-Tech Holding Group reported revenue of CN¥7.1b, which is a gain of 13%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Aerospace Hi-Tech Holding Group had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥60m. 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¥181m into a profit. So to be blunt we do think it is risky. 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. We've identified 1 warning sign with Aerospace Hi-Tech Holding Group , and understanding them should be part of your investment process.

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.