Is Chengdu ALD Aviation Manufacturing (SZSE:300696) Using Debt Sensibly?

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 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. We can see that Chengdu ALD Aviation Manufacturing Corporation (SZSE:300696) does use debt in its business. But is this debt a concern to shareholders?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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

How Much Debt Does Chengdu ALD Aviation Manufacturing Carry?

As you can see below, at the end of March 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. But on the other hand it also has CN¥922.3m in cash, leading to a CN¥897.3m net cash position.

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

According to the last reported balance sheet, Chengdu ALD Aviation Manufacturing had liabilities of CN¥112.2m due within 12 months, and liabilities of CN¥61.5m due beyond 12 months. On the other hand, it had cash of CN¥922.3m and CN¥347.1m worth of receivables due within a year. So it actually has CN¥1.10b 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. 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 52%, to CN¥254m. That makes us nervous, to say the least.

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 made a statutory profit of CN¥6.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. Be aware that Chengdu ALD Aviation Manufacturing is showing 3 warning signs in our investment analysis , and 1 of those is potentially serious...

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.

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