AVIC Xi'an Aircraft Industry Group (SZSE:000768) Has A Rock Solid 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.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that AVIC Xi'an Aircraft Industry Group Company Ltd. (SZSE:000768) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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, 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.

See our latest analysis for AVIC Xi'an Aircraft Industry Group

How Much Debt Does AVIC Xi'an Aircraft Industry Group Carry?

As you can see below, AVIC Xi'an Aircraft Industry Group had CN¥290.1m of debt at March 2024, down from CN¥2.37b a year prior. But it also has CN¥8.52b in cash to offset that, meaning it has CN¥8.23b net cash.

A Look At AVIC Xi'an Aircraft Industry Group's Liabilities

We can see from the most recent balance sheet that AVIC Xi'an Aircraft Industry Group had liabilities of CN¥59.8b falling due within a year, and liabilities of -CN¥1.75b due beyond that. Offsetting this, it had CN¥8.52b in cash and CN¥24.7b in receivables that were due within 12 months. So it has liabilities totalling CN¥24.8b more than its cash and near-term receivables, combined.

AVIC Xi'an Aircraft Industry Group has a market capitalization of CN¥67.4b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, AVIC Xi'an Aircraft Industry Group 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 Xi'an Aircraft Industry Group has boosted its EBIT by 55%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine AVIC Xi'an Aircraft Industry Group'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, a company can only pay off debt with cold hard cash, not accounting profits. AVIC Xi'an Aircraft Industry Group 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. Happily for any shareholders, AVIC Xi'an Aircraft Industry Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While AVIC Xi'an Aircraft Industry Group does have more liabilities than liquid assets, it also has net cash of CN¥8.23b. And it impressed us with free cash flow of -CN¥9.4b, being 124% of its EBIT. So is AVIC Xi'an Aircraft Industry Group's debt a risk? It doesn't seem so to us. Over time, share prices tend to follow earnings per share, so if you're interested in AVIC Xi'an Aircraft Industry Group, you may well want to click here to check an interactive graph of its earnings per share history.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com