These 4 Measures Indicate That AVIC Airborne Systems (SHSE:600372) Is Using Debt Extensively

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, AVIC Airborne Systems Co., Ltd. (SHSE:600372) does carry debt. But the more important question is: how much risk is that debt creating?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

View our latest analysis for AVIC Airborne Systems

How Much Debt Does AVIC Airborne Systems Carry?

You can click the graphic below for the historical numbers, but it shows that AVIC Airborne Systems had CN¥9.54b of debt in September 2024, down from CN¥11.7b, one year before. However, it does have CN¥10.9b in cash offsetting this, leading to net cash of CN¥1.37b.

How Strong Is AVIC Airborne Systems' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that AVIC Airborne Systems had liabilities of CN¥32.7b due within 12 months and liabilities of CN¥3.12b due beyond that. On the other hand, it had cash of CN¥10.9b and CN¥29.2b worth of receivables due within a year. So it actually has CN¥4.30b more liquid assets than total liabilities.

This surplus suggests that AVIC Airborne Systems has a conservative balance sheet, and could probably eliminate its debt without much difficulty. 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.

It is just as well that AVIC Airborne Systems's load is not too heavy, because its EBIT was down 32% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AVIC Airborne Systems has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. During the last three years, AVIC Airborne Systems burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While it is always sensible to investigate a company's debt, in this case AVIC Airborne Systems has CN¥1.37b in net cash and a decent-looking balance sheet. So while AVIC Airborne Systems does not have a great balance sheet, it's certainly not too bad. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of AVIC Airborne Systems's earnings per share history for free.

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.