Is AVIC Shenyang Aircraft (SHSE:600760) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. Importantly, AVIC Shenyang Aircraft Company Limited (SHSE:600760) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AVIC Shenyang Aircraft

What Is AVIC Shenyang Aircraft's Net Debt?

You can click the graphic below for the historical numbers, but it shows that AVIC Shenyang Aircraft had CN¥100.0m of debt in March 2024, down from CN¥150.0m, one year before. However, its balance sheet shows it holds CN¥8.06b in cash, so it actually has CN¥7.96b net cash.

How Strong Is AVIC Shenyang Aircraft's Balance Sheet?

According to the last reported balance sheet, AVIC Shenyang Aircraft had liabilities of CN¥29.2b due within 12 months, and liabilities of CN¥3.11b due beyond 12 months. On the other hand, it had cash of CN¥8.06b and CN¥16.2b worth of receivables due within a year. So its liabilities total CN¥8.04b more than the combination of its cash and short-term receivables.

Given AVIC Shenyang Aircraft has a humongous market capitalization of CN¥110.5b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, AVIC Shenyang Aircraft boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that AVIC Shenyang Aircraft has boosted its EBIT by 31%, thus reducing the spectre of future debt repayments. 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 Shenyang Aircraft'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. AVIC Shenyang Aircraft 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 Shenyang Aircraft 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

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¥7.96b. And we liked the look of last year's 31% year-on-year EBIT growth. So we don't have any problem with AVIC Shenyang Aircraft's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for AVIC Shenyang Aircraft you should know about.

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.