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.' 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 Aerosun Corporation (SHSE:600501) makes use of debt. But is this debt a concern to shareholders?
When Is Debt Dangerous?
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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
View our latest analysis for Aerosun
What Is Aerosun's Debt?
You can click the graphic below for the historical numbers, but it shows that Aerosun had CN¥77.1m of debt in March 2024, down from CN¥297.3m, one year before. But it also has CN¥498.7m in cash to offset that, meaning it has CN¥421.6m net cash.
How Healthy Is Aerosun's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Aerosun had liabilities of CN¥2.85b due within 12 months and liabilities of CN¥37.2m due beyond that. Offsetting this, it had CN¥498.7m in cash and CN¥1.88b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥512.0m.
Given Aerosun has a market capitalization of CN¥7.19b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aerosun boasts net cash, so it's fair to say it does not have a heavy debt load!
Shareholders should be aware that Aerosun's EBIT was down 81% last year. If that decline continues then paying off debt will be harder than selling foie gras at a vegan convention. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Aerosun 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.
Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Aerosun 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. Over the last three years, Aerosun actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.
Summing Up
We could understand if investors are concerned about Aerosun's liabilities, but we can be reassured by the fact it has has net cash of CN¥421.6m. The cherry on top was that in converted 187% of that EBIT to free cash flow, bringing in CN¥291m. So we don't have any problem with Aerosun's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 3 warning signs for Aerosun (1 is a bit unpleasant) you should be aware of.
If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.
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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.
About SHSE:600501
Aerosun
Manufactures and sells special vehicles in China and internationally.
Adequate balance sheet and overvalued.