Shaanxi Aerospace Power Hi-Tech (SHSE:600343) Is Making Moderate Use Of Debt

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Shaanxi Aerospace Power Hi-Tech Co., Ltd. (SHSE:600343) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

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

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

As you can see below, at the end of September 2023, Shaanxi Aerospace Power Hi-Tech had CN¥422.0m of debt, up from CN¥364.0m a year ago. Click the image for more detail. However, it does have CN¥289.9m in cash offsetting this, leading to net debt of about CN¥132.1m.

A Look At Shaanxi Aerospace Power Hi-Tech's Liabilities

Zooming in on the latest balance sheet data, we can see that Shaanxi Aerospace Power Hi-Tech had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥81.1m due beyond that. On the other hand, it had cash of CN¥289.9m and CN¥644.9m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥299.8m.

Of course, Shaanxi Aerospace Power Hi-Tech has a market capitalization of CN¥5.03b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is Shaanxi Aerospace Power Hi-Tech'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.

In the last year Shaanxi Aerospace Power Hi-Tech had a loss before interest and tax, and actually shrunk its revenue by 29%, to CN¥937m. To be frank that doesn't bode well.

Caveat Emptor

While Shaanxi Aerospace Power Hi-Tech's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost CN¥112m at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥160m of cash over the last year. 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. Be aware that Shaanxi Aerospace Power Hi-Tech is showing 1 warning sign in our investment analysis , you should know about...

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.