These 4 Measures Indicate That Beijing Shenzhou Aerospace Software Technology (SHSE:688562) Is Using Debt Safely

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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, Beijing Shenzhou Aerospace Software Technology Co., ltd (SHSE:688562) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. 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, plenty of companies use debt to fund growth, without any negative consequences. 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 Beijing Shenzhou Aerospace Software Technology

What Is Beijing Shenzhou Aerospace Software Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2023 Beijing Shenzhou Aerospace Software Technology had CN¥17.4m of debt, an increase on CN¥16.3m, over one year. But it also has CN¥1.53b in cash to offset that, meaning it has CN¥1.51b net cash.

How Healthy Is Beijing Shenzhou Aerospace Software Technology's Balance Sheet?

We can see from the most recent balance sheet that Beijing Shenzhou Aerospace Software Technology had liabilities of CN¥1.38b falling due within a year, and liabilities of CN¥214.5m due beyond that. Offsetting these obligations, it had cash of CN¥1.53b as well as receivables valued at CN¥561.3m due within 12 months. So it can boast CN¥497.5m more liquid assets than total liabilities.

This short term liquidity is a sign that Beijing Shenzhou Aerospace Software Technology could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that Beijing Shenzhou Aerospace Software Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

In addition to that, we're happy to report that Beijing Shenzhou Aerospace Software Technology has boosted its EBIT by 87%, thus reducing the spectre of future debt repayments. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Beijing Shenzhou Aerospace Software 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 company can only pay off debt with cold hard cash, not accounting profits. Beijing Shenzhou Aerospace Software Technology may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Beijing Shenzhou Aerospace Software Technology actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

Summing Up

While it is always sensible to investigate a company's debt, in this case Beijing Shenzhou Aerospace Software Technology has CN¥1.51b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of -CN¥209m, being 123% of its EBIT. So we don't think Beijing Shenzhou Aerospace Software Technology's use of debt is risky. Above most other metrics, we think its important to track how fast earnings per share is growing, if at all. If you've also come to that realization, you're in luck, because today you can view this interactive graph of Beijing Shenzhou Aerospace Software Technology's earnings per share history for free.

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.