Is Aerosun (SHSE:600501) A Risky Investment?

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We can see that Aerosun Corporation (SHSE:600501) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Aerosun

How Much Debt Does Aerosun Carry?

The image below, which you can click on for greater detail, shows that Aerosun had debt of CN¥465.7m at the end of September 2024, a reduction from CN¥691.2m over a year. On the flip side, it has CN¥337.7m in cash leading to net debt of about CN¥128.0m.

How Healthy Is Aerosun's Balance Sheet?

We can see from the most recent balance sheet that Aerosun had liabilities of CN¥3.15b falling due within a year, and liabilities of CN¥45.4m due beyond that. On the other hand, it had cash of CN¥337.7m and CN¥2.17b worth of receivables due within a year. So it has liabilities totalling CN¥683.9m more than its cash and near-term receivables, combined.

Of course, Aerosun has a market capitalization of CN¥9.12b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Carrying virtually no net debt, Aerosun has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Aerosun 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.

Over 12 months, Aerosun made a loss at the EBIT level, and saw its revenue drop to CN¥2.7b, which is a fall of 32%. To be frank that doesn't bode well.

Caveat Emptor

Not only did Aerosun's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥112m at the EBIT level. 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. For example, we would not want to see a repeat of last year's loss of CN¥110m. So to be blunt we do think it is risky. 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. For instance, we've identified 1 warning sign for Aerosun 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.

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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.