Is Beijing Aerospace ChangfengLtd (SHSE:600855) Using Too Much Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Beijing Aerospace Changfeng Co.,Ltd (SHSE:600855) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Beijing Aerospace ChangfengLtd

How Much Debt Does Beijing Aerospace ChangfengLtd Carry?

As you can see below, at the end of September 2024, Beijing Aerospace ChangfengLtd had CN¥60.0m of debt, up from CN¥40.0m a year ago. Click the image for more detail. However, it does have CN¥820.4m in cash offsetting this, leading to net cash of CN¥760.4m.

How Healthy Is Beijing Aerospace ChangfengLtd's Balance Sheet?

We can see from the most recent balance sheet that Beijing Aerospace ChangfengLtd had liabilities of CN¥1.78b falling due within a year, and liabilities of CN¥215.9m due beyond that. On the other hand, it had cash of CN¥820.4m and CN¥1.30b worth of receivables due within a year. So it can boast CN¥129.7m more liquid assets than total liabilities.

This surplus suggests that Beijing Aerospace ChangfengLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Beijing Aerospace ChangfengLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Aerospace ChangfengLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Beijing Aerospace ChangfengLtd made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 26%. That makes us nervous, to say the least.

So How Risky Is Beijing Aerospace ChangfengLtd?

Although Beijing Aerospace ChangfengLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥73m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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 Beijing Aerospace ChangfengLtd .

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.