Does Chengdu ALD Aviation Manufacturing (SZSE:300696) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Chengdu ALD Aviation Manufacturing Corporation (SZSE:300696) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Chengdu ALD Aviation Manufacturing

What Is Chengdu ALD Aviation Manufacturing's Net Debt?

As you can see below, at the end of September 2024, Chengdu ALD Aviation Manufacturing had CN¥25.0m of debt, up from CN¥15.0m a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥901.8m in cash, so it actually has CN¥876.8m net cash.

How Healthy Is Chengdu ALD Aviation Manufacturing's Balance Sheet?

We can see from the most recent balance sheet that Chengdu ALD Aviation Manufacturing had liabilities of CN¥186.9m falling due within a year, and liabilities of CN¥62.1m due beyond that. Offsetting these obligations, it had cash of CN¥901.8m as well as receivables valued at CN¥360.0m due within 12 months. So it actually has CN¥1.01b more liquid assets than total liabilities.

This surplus suggests that Chengdu ALD Aviation Manufacturing is using debt in a way that is appears to be both safe and conservative. Given it has easily adequate short term liquidity, we don't think it will have any issues with its lenders. Succinctly put, Chengdu ALD Aviation Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if Chengdu ALD Aviation Manufacturing can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year Chengdu ALD Aviation Manufacturing had a loss before interest and tax, and actually shrunk its revenue by 19%, to CN¥268m. That's not what we would hope to see.

So How Risky Is Chengdu ALD Aviation Manufacturing?

Although Chengdu ALD Aviation Manufacturing had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥53m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Case in point: We've spotted 2 warning signs for Chengdu ALD Aviation Manufacturing you should be aware of.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.