Does AviChina Industry & Technology (HKG:2357) Have A Healthy Balance Sheet?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies AviChina Industry & Technology Company Limited (HKG:2357) makes use of debt. But is this debt a concern to shareholders?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for AviChina Industry & Technology

What Is AviChina Industry & Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 AviChina Industry & Technology had CN¥11.4b of debt, an increase on CN¥10.8b, over one year. But on the other hand it also has CN¥35.9b in cash, leading to a CN¥24.5b net cash position.

A Look At AviChina Industry & Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that AviChina Industry & Technology had liabilities of CN¥80.0b due within 12 months and liabilities of CN¥5.81b due beyond that. Offsetting these obligations, it had cash of CN¥35.9b as well as receivables valued at CN¥38.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.7b.

AviChina Industry & Technology has a market capitalization of CN¥29.5b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, AviChina Industry & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that AviChina Industry & Technology has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AviChina Industry & Technology's ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. AviChina Industry & 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. In the last three years, AviChina Industry & Technology's free cash flow amounted to 39% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While AviChina Industry & Technology does have more liabilities than liquid assets, it also has net cash of CN¥24.5b. So we don't have any problem with AviChina Industry & Technology's use of debt. 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 AviChina Industry & Technology's earnings per share history for free.

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.

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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.