Is AVIC Xi'an Aircraft Industry Group (SZSE:000768) Using Too Much Debt?

Warren Buffett famously said, '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. As with many other companies AVIC Xi'an Aircraft Industry Group Company Ltd. (SZSE:000768) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. The first step when considering a company's debt levels is to consider its cash and debt together.

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

What Is AVIC Xi'an Aircraft Industry Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2024 AVIC Xi'an Aircraft Industry Group had debt of CN¥2.13b, up from CN¥1.61b in one year. But on the other hand it also has CN¥6.09b in cash, leading to a CN¥3.96b net cash position.

How Strong Is AVIC Xi'an Aircraft Industry Group's Balance Sheet?

The latest balance sheet data shows that AVIC Xi'an Aircraft Industry Group had liabilities of CN¥55.4b due within a year, and liabilities of -CN¥1.84b falling due after that. Offsetting this, it had CN¥6.09b in cash and CN¥26.3b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥21.2b.

AVIC Xi'an Aircraft Industry Group has a market capitalization of CN¥64.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, AVIC Xi'an Aircraft Industry Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

Better yet, AVIC Xi'an Aircraft Industry Group grew its EBIT by 237% last year, which is an impressive improvement. If maintained that growth will make the debt even more manageable in the years ahead. 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 Xi'an Aircraft Industry Group 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While AVIC Xi'an Aircraft Industry Group has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. 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¥3.96b. The cherry on top was that in converted 292% of that EBIT to free cash flow, bringing in -CN¥3.1b. So is AVIC Xi'an Aircraft Industry Group's debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with AVIC Xi'an Aircraft Industry Group .

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.