Beijing Emerging Eastern Aviation Equipment (SZSE:002933) Is Using Debt Safely

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 can see that Beijing Emerging Eastern Aviation Equipment Co., Ltd. (SZSE:002933) does use debt in its business. But is this debt a concern to shareholders?

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 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 think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Beijing Emerging Eastern Aviation Equipment

What Is Beijing Emerging Eastern Aviation Equipment's Net Debt?

The chart below, which you can click on for greater detail, shows that Beijing Emerging Eastern Aviation Equipment had CN¥408.8m in debt in September 2024; about the same as the year before. But it also has CN¥1.28b in cash to offset that, meaning it has CN¥867.5m net cash.

How Strong Is Beijing Emerging Eastern Aviation Equipment's Balance Sheet?

According to the last reported balance sheet, Beijing Emerging Eastern Aviation Equipment had liabilities of CN¥421.4m due within 12 months, and liabilities of CN¥473.0m due beyond 12 months. Offsetting this, it had CN¥1.28b in cash and CN¥381.8m in receivables that were due within 12 months. So it actually has CN¥763.7m more liquid assets than total liabilities.

It's good to see that Beijing Emerging Eastern Aviation Equipment has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, Beijing Emerging Eastern Aviation Equipment boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Beijing Emerging Eastern Aviation Equipment will need earnings to service that debt. 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, Beijing Emerging Eastern Aviation Equipment reported revenue of CN¥467m, which is a gain of 54%, 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.

So How Risky Is Beijing Emerging Eastern Aviation Equipment?

While Beijing Emerging Eastern Aviation Equipment lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥18m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 54% revenue growth over the last year, we think there's a decent chance the company is on track. There's no doubt fast top line growth can cure all manner of ills, for a stock. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Beijing Emerging Eastern Aviation Equipment (of which 1 is potentially serious!) you should know about.

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.