Here's Why AviChina Industry & Technology (HKG:2357) Can Manage Its Debt Responsibly

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 can see that AviChina Industry & Technology Company Limited (HKG:2357) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for AviChina Industry & Technology

How Much Debt Does AviChina Industry & Technology Carry?

As you can see below, AviChina Industry & Technology had CN¥12.8b of debt, at June 2023, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥32.5b in cash to offset that, meaning it has CN¥19.7b net cash.

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¥84.0b due within 12 months and liabilities of CN¥9.52b due beyond that. On the other hand, it had cash of CN¥32.5b and CN¥59.1b worth of receivables due within a year. So its total liabilities are just about perfectly matched by its shorter-term, liquid assets.

Given AviChina Industry & Technology has a market capitalization of CN¥27.7b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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.

On the other hand, AviChina Industry & Technology saw its EBIT drop by 5.7% in the last twelve months. That sort of decline, if sustained, will obviously make debt harder to handle. 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 AviChina Industry & Technology can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While AviChina Industry & Technology 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. During the last three years, AviChina Industry & Technology burned a lot of cash. 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

We could understand if investors are concerned about AviChina Industry & Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥19.7b. So we don't have any problem with AviChina Industry & Technology's use of debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for AviChina Industry & Technology you should be aware of.

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.