Would Shaanxi Aerospace Power Hi-Tech (SHSE:600343) Be Better Off With Less 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies Shaanxi Aerospace Power Hi-Tech Co., Ltd. (SHSE:600343) makes use of debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. 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, 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.

View our latest analysis for Shaanxi Aerospace Power Hi-Tech

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

As you can see below, at the end of March 2024, Shaanxi Aerospace Power Hi-Tech had CN¥442.0m of debt, up from CN¥374.0m a year ago. Click the image for more detail. However, it also had CN¥220.1m in cash, and so its net debt is CN¥221.9m.

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

The latest balance sheet data shows that Shaanxi Aerospace Power Hi-Tech had liabilities of CN¥1.15b due within a year, and liabilities of CN¥241.3m falling due after that. On the other hand, it had cash of CN¥220.1m and CN¥720.6m worth of receivables due within a year. So it has liabilities totalling CN¥445.8m more than its cash and near-term receivables, combined.

Given Shaanxi Aerospace Power Hi-Tech has a market capitalization of CN¥5.18b, it's hard to believe these liabilities pose much 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 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 23%, to CN¥914m. 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. To be specific the EBIT loss came in at CN¥191m. 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. However, it doesn't help that it burned through CN¥271m of cash over the last year. So in short it's a really risky stock. 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. Be aware that Shaanxi Aerospace Power Hi-Tech is showing 2 warning signs in our investment analysis , you should know about...

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.

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