Does AVIC Airborne Systems (SHSE:600372) Have A Healthy Balance Sheet?

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.' 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. We can see that AVIC Airborne Systems Co., Ltd. (SHSE:600372) does use debt in its business. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AVIC Airborne Systems

What Is AVIC Airborne Systems's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 AVIC Airborne Systems had debt of CN¥8.40b, up from CN¥6.65b in one year. But it also has CN¥13.3b in cash to offset that, meaning it has CN¥4.89b net cash.

A Look At AVIC Airborne Systems' Liabilities

The latest balance sheet data shows that AVIC Airborne Systems had liabilities of CN¥31.6b due within a year, and liabilities of CN¥4.36b falling due after that. Offsetting these obligations, it had cash of CN¥13.3b as well as receivables valued at CN¥27.9b due within 12 months. So it can boast CN¥5.28b more liquid assets than total liabilities.

This short term liquidity is a sign that AVIC Airborne Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AVIC Airborne Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

But the bad news is that AVIC Airborne Systems has seen its EBIT plunge 17% in the last twelve months. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AVIC Airborne Systems's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. AVIC Airborne Systems may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. During the last three years, AVIC Airborne Systems burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case AVIC Airborne Systems has CN¥4.89b in net cash and a decent-looking balance sheet. So we are not troubled with AVIC Airborne Systems's debt use. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 1 warning sign for AVIC Airborne Systems that you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.