Does Ligeance Aerospace TechnologyLtd (SZSE:000697) Have A Healthy Balance Sheet?

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 Ligeance Aerospace Technology Co.,Ltd. (SZSE:000697) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

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. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

Check out our latest analysis for Ligeance Aerospace TechnologyLtd

What Is Ligeance Aerospace TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2024 Ligeance Aerospace TechnologyLtd had debt of CN¥2.57b, up from CN¥2.24b in one year. On the flip side, it has CN¥96.9m in cash leading to net debt of about CN¥2.47b.

How Healthy Is Ligeance Aerospace TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ligeance Aerospace TechnologyLtd had liabilities of CN¥1.94b due within 12 months and liabilities of CN¥1.21b due beyond that. Offsetting this, it had CN¥96.9m in cash and CN¥503.2m in receivables that were due within 12 months. So its liabilities total CN¥2.55b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since Ligeance Aerospace TechnologyLtd has a market capitalization of CN¥7.67b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Ligeance Aerospace TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Ligeance Aerospace TechnologyLtd reported revenue of CN¥1.8b, which is a gain of 29%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

Caveat Emptor

Even though Ligeance Aerospace TechnologyLtd managed to grow its top line quite deftly, the cold hard truth is that it is losing money on the EBIT line. Indeed, it lost CN¥65m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥9.1m of cash over the last year. So suffice it to say we do consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Ligeance Aerospace TechnologyLtd you should be aware of, and 1 of them is a bit unpleasant.

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.