Is Beijing Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455) A Risky Investment?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. Importantly, Beijing Aerospace Shenzhou Intelligent Equipment Technology Co., Ltd. (SZSE:300455) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Beijing Aerospace Shenzhou Intelligent Equipment Technology

What Is Beijing Aerospace Shenzhou Intelligent Equipment Technology's Net Debt?

As you can see below, Beijing Aerospace Shenzhou Intelligent Equipment Technology had CN¥308.0m of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. On the flip side, it has CN¥202.5m in cash leading to net debt of about CN¥105.5m.

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

The latest balance sheet data shows that Beijing Aerospace Shenzhou Intelligent Equipment Technology had liabilities of CN¥1.67b due within a year, and liabilities of CN¥72.8m falling due after that. Offsetting this, it had CN¥202.5m in cash and CN¥858.8m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥677.4m.

Of course, Beijing Aerospace Shenzhou Intelligent Equipment Technology has a market capitalization of CN¥7.64b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Carrying virtually no net debt, Beijing Aerospace Shenzhou Intelligent Equipment Technology has a very light debt load indeed.

In order to size up a company's debt relative to its earnings, we calculate its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and its earnings before interest and tax (EBIT) divided by its interest expense (its 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 has net debt of just 0.96 times EBITDA, indicating that it is certainly not a reckless borrower. And this view is supported by the solid interest coverage, with EBIT coming in at 8.8 times the interest expense over the last year. In fact Beijing Aerospace Shenzhou Intelligent Equipment Technology's saving grace is its low debt levels, because its EBIT has tanked 35% in the last twelve months. When a company sees its earnings tank, it can sometimes find its relationships with its lenders turn sour. There's no doubt that we learn most about debt from the balance sheet. But it is Beijing Aerospace Shenzhou Intelligent Equipment Technology's earnings that will influence how the balance sheet holds up in the future. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. So we always check how much of that EBIT is translated into free cash flow. During the last three years, Beijing Aerospace Shenzhou Intelligent Equipment Technology burned a lot of cash. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

While Beijing Aerospace Shenzhou Intelligent Equipment Technology's conversion of EBIT to free cash flow makes us cautious about it, its track record of (not) growing its EBIT is no better. At least its interest cover gives us reason to be optimistic. Taking the abovementioned factors together we do think Beijing Aerospace Shenzhou Intelligent Equipment Technology's debt poses some risks to the business. So while that leverage does boost returns on equity, we wouldn't really want to see it increase from here. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example Beijing Aerospace Shenzhou Intelligent Equipment Technology has 2 warning signs (and 1 which is potentially serious) we think 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.