Does Beijing Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455) Have A Healthy Balance Sheet?

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.' 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. Importantly, Beijing Aerospace Shenzhou Intelligent Equipment Technology Co., Ltd. (SZSE:300455) does carry debt. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Beijing Aerospace Shenzhou Intelligent Equipment Technology

How Much Debt Does Beijing Aerospace Shenzhou Intelligent Equipment Technology Carry?

As you can see below, at the end of September 2024, Beijing Aerospace Shenzhou Intelligent Equipment Technology had CN¥365.0m of debt, up from CN¥308.0m a year ago. Click the image for more detail. However, it also had CN¥241.0m in cash, and so its net debt is CN¥124.0m.

How Strong Is Beijing Aerospace Shenzhou Intelligent Equipment Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Beijing Aerospace Shenzhou Intelligent Equipment Technology had liabilities of CN¥1.37b due within 12 months and liabilities of CN¥82.2m due beyond that. On the other hand, it had cash of CN¥241.0m and CN¥734.4m worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥474.5m.

Given Beijing Aerospace Shenzhou Intelligent Equipment Technology has a market capitalization of CN¥10.1b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, Beijing Aerospace Shenzhou Intelligent Equipment Technology has virtually no net debt, so it's fair to say it does not have a heavy debt load!

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). This way, we consider both the absolute quantum of the debt, as well as the interest rates paid on it.

Beijing Aerospace Shenzhou Intelligent Equipment Technology's net debt is only 1.1 times its EBITDA. And its EBIT easily covers its interest expense, being 10.9 times the size. So you could argue it is no more threatened by its debt than an elephant is by a mouse. But the other side of the story is that Beijing Aerospace Shenzhou Intelligent Equipment Technology saw its EBIT decline by 9.2% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Beijing Aerospace Shenzhou Intelligent Equipment Technology 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. So we always check how much of that EBIT is translated into free cash flow. In the last three years, Beijing Aerospace Shenzhou Intelligent Equipment Technology's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Our View

When it comes to the balance sheet, the standout positive for Beijing Aerospace Shenzhou Intelligent Equipment Technology was the fact that it seems able to cover its interest expense with its EBIT confidently. However, our other observations weren't so heartening. For example, its EBIT growth rate makes us a little nervous about its debt. Considering this range of data points, we think Beijing Aerospace Shenzhou Intelligent Equipment Technology is in a good position to manage its debt levels. But a word of caution: we think debt levels are high enough to justify ongoing monitoring. 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. For example Beijing Aerospace Shenzhou Intelligent Equipment Technology has 3 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

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.