Is Shaanxi Aerospace Power Hi-Tech (SHSE:600343) 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 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 Shaanxi Aerospace Power Hi-Tech Co., Ltd. (SHSE:600343) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Shaanxi Aerospace Power Hi-Tech

What Is Shaanxi Aerospace Power Hi-Tech's Net Debt?

As you can see below, Shaanxi Aerospace Power Hi-Tech had CN¥412.0m of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, because it has a cash reserve of CN¥104.1m, its net debt is less, at about CN¥307.9m.

How Healthy Is Shaanxi Aerospace Power Hi-Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shaanxi Aerospace Power Hi-Tech had liabilities of CN¥1.14b due within 12 months and liabilities of CN¥244.8m due beyond that. On the other hand, it had cash of CN¥104.1m and CN¥737.7m worth of receivables due within a year. So its liabilities total CN¥546.0m more than the combination of its cash and short-term receivables.

Since publicly traded Shaanxi Aerospace Power Hi-Tech shares are worth a total of CN¥6.85b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Shaanxi Aerospace Power Hi-Tech will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Shaanxi Aerospace Power Hi-Tech's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Shaanxi Aerospace Power Hi-Tech produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥214m. 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. Another cause for caution is that is bled CN¥181m in negative free cash flow over the last twelve months. So to be blunt we 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Shaanxi Aerospace Power Hi-Tech you should know about.

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.