Here's Why AviChina Industry & Technology (HKG:2357) Has A Meaningful Debt Burden

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. As with many other companies AviChina Industry & Technology Company Limited (HKG:2357) makes use of debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for AviChina Industry & Technology

What Is AviChina Industry & Technology's Debt?

As you can see below, at the end of June 2024, AviChina Industry & Technology had CN¥16.8b of debt, up from CN¥12.8b a year ago. Click the image for more detail. However, it does have CN¥30.3b in cash offsetting this, leading to net cash of CN¥13.5b.

How Healthy Is AviChina Industry & Technology's Balance Sheet?

We can see from the most recent balance sheet that AviChina Industry & Technology had liabilities of CN¥86.7b falling due within a year, and liabilities of CN¥9.13b due beyond that. Offsetting these obligations, it had cash of CN¥30.3b as well as receivables valued at CN¥62.4b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥3.13b.

Given AviChina Industry & Technology has a market capitalization of CN¥27.6b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, AviChina Industry & Technology boasts net cash, so it's fair to say it does not have a heavy debt load!

But the bad news is that AviChina Industry & Technology has seen its EBIT plunge 15% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 AviChina Industry & Technology'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 business needs free cash flow to pay off debt; accounting profits just don't cut it. 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. Over the last three years, AviChina Industry & Technology 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 AviChina Industry & Technology does have more liabilities than liquid assets, it also has net cash of CN¥13.5b. So while AviChina Industry & Technology does not have a great balance sheet, it's certainly not too bad. Over time, share prices tend to follow earnings per share, so if you're interested in AviChina Industry & Technology, you may well want to click here to check an interactive graph of its earnings per share history.

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.