Is AVIC Xi'an Aircraft Industry Group (SZSE:000768) 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.' 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 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View 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 September 2024 AVIC Xi'an Aircraft Industry Group had debt of CN¥3.17b, up from CN¥1.54b in one year. However, it does have CN¥6.38b in cash offsetting this, leading to net cash of CN¥3.21b.

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

Zooming in on the latest balance sheet data, we can see that AVIC Xi'an Aircraft Industry Group had liabilities of CN¥57.9b due within 12 months and liabilities of -CN¥2.01b due beyond that. Offsetting these obligations, it had cash of CN¥6.38b as well as receivables valued at CN¥27.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥22.6b.

While this might seem like a lot, it is not so bad since AVIC Xi'an Aircraft Industry Group has a market capitalization of CN¥70.8b, 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. 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 144% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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. Over the last three years, AVIC Xi'an Aircraft Industry Group actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing Up

While AVIC Xi'an Aircraft Industry Group does have more liabilities than liquid assets, it also has net cash of CN¥3.21b. The cherry on top was that in converted 258% of that EBIT to free cash flow, bringing in -CN¥1.6b. So we don't think AVIC Xi'an Aircraft Industry Group's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of AVIC Xi'an Aircraft Industry Group's earnings per share history for free.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.