Is Aerospace Hi-Tech Holding Group (SZSE:000901) Using Too Much Debt?

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 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. As with many other companies Aerospace Hi-Tech Holding Group Co., Ltd. (SZSE:000901) makes use of debt. 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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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

The image below, which you can click on for greater detail, shows that Aerospace Hi-Tech Holding Group had debt of CN¥781.0m at the end of September 2024, a reduction from CN¥898.1m over a year. However, it does have CN¥744.6m in cash offsetting this, leading to net debt of about CN¥36.4m.

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

Zooming in on the latest balance sheet data, we can see that Aerospace Hi-Tech Holding Group had liabilities of CN¥2.68b due within 12 months 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.

Since publicly traded Aerospace Hi-Tech Holding Group shares are worth a total of CN¥9.16b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Aerospace Hi-Tech Holding Group has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aerospace Hi-Tech Holding Group 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.

View our latest analysis for Aerospace Hi-Tech Holding Group

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. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, Aerospace Hi-Tech Holding Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥60m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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 we do think this stock is quite risky. 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. Case in point: We've spotted 1 warning sign for Aerospace Hi-Tech Holding Group you should be aware of.

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.