These 4 Measures Indicate That Beijing Aerospace Shenzhou Intelligent Equipment Technology (SZSE:300455) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. 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. 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?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Beijing Aerospace Shenzhou Intelligent Equipment Technology had CN¥297.0m of debt, an increase on CN¥271.0m, over one year. However, it also had CN¥159.1m in cash, and so its net debt is CN¥137.9m.

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¥1.37b due within a year, and liabilities of CN¥83.4m falling due after that. Offsetting these obligations, it had cash of CN¥159.1m as well as receivables valued at CN¥743.7m due within 12 months. So its liabilities total CN¥548.6m more than the combination of its cash and short-term receivables.

Since publicly traded Beijing Aerospace Shenzhou Intelligent Equipment Technology shares are worth a total of CN¥7.39b, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). 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 covers its interest expense a whopping 10.5 times over. So you could argue it is no more threatened by its debt than an elephant is by a mouse. Another good sign is that Beijing Aerospace Shenzhou Intelligent Equipment Technology has been able to increase its EBIT by 24% in twelve months, making it easier to pay down debt. 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 Aerospace Shenzhou Intelligent Equipment Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

Beijing Aerospace Shenzhou Intelligent Equipment Technology's conversion of EBIT to free cash flow was a real negative on this analysis, although the other factors we considered were considerably better. In particular, we are dazzled with its EBIT growth rate. When we consider all the elements mentioned above, it seems to us that Beijing Aerospace Shenzhou Intelligent Equipment Technology is managing its debt quite well. Having said that, the load is sufficiently heavy that we would recommend any shareholders keep a close eye on it. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with Beijing Aerospace Shenzhou Intelligent Equipment Technology (at least 1 which shouldn't be ignored) , and understanding them should be part of your investment process.

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.