Here's Why Chengdu ALD Aviation Manufacturing (SZSE:300696) Can Manage Its Debt Responsibly

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.' 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. Importantly, Chengdu ALD Aviation Manufacturing Corporation (SZSE:300696) does carry debt. But the real question is whether this debt is making the company risky.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Chengdu ALD Aviation Manufacturing

What Is Chengdu ALD Aviation Manufacturing's Debt?

The chart below, which you can click on for greater detail, shows that Chengdu ALD Aviation Manufacturing had CN¥15.0m in debt in September 2023; about the same as the year before. However, it does have CN¥853.9m in cash offsetting this, leading to net cash of CN¥838.9m.

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

The latest balance sheet data shows that Chengdu ALD Aviation Manufacturing had liabilities of CN¥191.4m due within a year, and liabilities of CN¥64.0m falling due after that. On the other hand, it had cash of CN¥853.9m and CN¥523.3m worth of receivables due within a year. So it can boast CN¥1.12b 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. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that Chengdu ALD Aviation Manufacturing has more cash than debt is arguably a good indication that it can manage its debt safely.

It is just as well that Chengdu ALD Aviation Manufacturing's load is not too heavy, because its EBIT was down 70% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Chengdu ALD Aviation Manufacturing has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. In the last three years, Chengdu ALD Aviation Manufacturing'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.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Chengdu ALD Aviation Manufacturing has net cash of CN¥838.9m, as well as more liquid assets than liabilities. So we don't have any problem with Chengdu ALD Aviation Manufacturing's use of debt. 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. For example - Chengdu ALD Aviation Manufacturing has 2 warning signs we think you should be aware of.

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.