AVIC Heavy Machinery (SHSE:600765) Has A Pretty Healthy Balance Sheet

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. We note that AVIC Heavy Machinery Co., Ltd. (SHSE:600765) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AVIC Heavy Machinery

What Is AVIC Heavy Machinery's Debt?

As you can see below, at the end of September 2024, AVIC Heavy Machinery had CN¥3.88b of debt, up from CN¥2.38b a year ago. Click the image for more detail. However, it does have CN¥4.00b in cash offsetting this, leading to net cash of CN¥115.2m.

How Strong Is AVIC Heavy Machinery's Balance Sheet?

We can see from the most recent balance sheet that AVIC Heavy Machinery had liabilities of CN¥10.8b falling due within a year, and liabilities of CN¥3.14b due beyond that. On the other hand, it had cash of CN¥4.00b and CN¥10.3b worth of receivables due within a year. So it actually has CN¥355.4m more liquid assets than total liabilities.

Having regard to AVIC Heavy Machinery's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥30.5b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that AVIC Heavy Machinery has more cash than debt is arguably a good indication that it can manage its debt safely.

While AVIC Heavy Machinery doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if AVIC Heavy Machinery can strengthen its balance sheet over time. 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 Heavy Machinery 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. Over the last three years, AVIC Heavy Machinery 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

While it is always sensible to investigate a company's debt, in this case AVIC Heavy Machinery has CN¥115.2m in net cash and a decent-looking balance sheet. So we are not troubled with AVIC Heavy Machinery's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 1 warning sign we've spotted with AVIC Heavy Machinery .

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.