These 4 Measures Indicate That Aerospace CH UAVLtd (SZSE:002389) Is Using Debt Reasonably Well

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that Aerospace CH UAV Co.,Ltd (SZSE:002389) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Aerospace CH UAVLtd

What Is Aerospace CH UAVLtd's Debt?

The image below, which you can click on for greater detail, shows that Aerospace CH UAVLtd had debt of CN¥89.0m at the end of March 2024, a reduction from CN¥188.5m over a year. But on the other hand it also has CN¥1.47b in cash, leading to a CN¥1.38b net cash position.

A Look At Aerospace CH UAVLtd's Liabilities

According to the last reported balance sheet, Aerospace CH UAVLtd had liabilities of CN¥1.97b due within 12 months, and liabilities of CN¥169.0m due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.47b as well as receivables valued at CN¥3.42b due within 12 months. So it actually has CN¥2.75b more liquid assets than total liabilities.

This surplus suggests that Aerospace CH UAVLtd 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. Simply put, the fact that Aerospace CH UAVLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

In fact Aerospace CH UAVLtd's saving grace is its low debt levels, because its EBIT has tanked 26% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Aerospace CH UAVLtd's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Aerospace CH UAVLtd 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. Over the last three years, Aerospace CH UAVLtd saw substantial negative free cash flow, in total. 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.

Summing Up

While it is always sensible to investigate a company's debt, in this case Aerospace CH UAVLtd has CN¥1.38b in net cash and a decent-looking balance sheet. So we don't have any problem with Aerospace CH UAVLtd's use of debt. 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. To that end, you should be aware of the 2 warning signs we've spotted with Aerospace CH UAVLtd .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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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