AVIC Shenyang Aircraft (SHSE:600760) Seems To Use Debt Quite Sensibly

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. We note that AVIC Shenyang Aircraft Company Limited (SHSE:600760) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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 AVIC Shenyang Aircraft

How Much Debt Does AVIC Shenyang Aircraft Carry?

You can click the graphic below for the historical numbers, but it shows that AVIC Shenyang Aircraft had CN¥100.0m of debt in June 2024, down from CN¥220.1m, one year before. However, it does have CN¥8.31b in cash offsetting this, leading to net cash of CN¥8.21b.

How Healthy Is AVIC Shenyang Aircraft's Balance Sheet?

We can see from the most recent balance sheet that AVIC Shenyang Aircraft had liabilities of CN¥28.2b falling due within a year, and liabilities of CN¥2.66b due beyond that. On the other hand, it had cash of CN¥8.31b and CN¥15.4b worth of receivables due within a year. So it has liabilities totalling CN¥7.07b more than its cash and near-term receivables, combined.

Of course, AVIC Shenyang Aircraft has a titanic market capitalization of CN¥108.4b, 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. While it does have liabilities worth noting, AVIC Shenyang Aircraft also has more cash than debt, so we're pretty confident it can manage its debt safely.

And we also note warmly that AVIC Shenyang Aircraft grew its EBIT by 19% last year, making its debt load easier to handle. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if AVIC Shenyang Aircraft can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AVIC Shenyang Aircraft 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, AVIC Shenyang Aircraft saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about AVIC Shenyang Aircraft's liabilities, but we can be reassured by the fact it has has net cash of CN¥8.21b. And we liked the look of last year's 19% year-on-year EBIT growth. So we are not troubled with AVIC Shenyang Aircraft's debt use. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for AVIC Shenyang Aircraft you should be aware of, and 1 of them shouldn't be ignored.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.