Hong Kong Aerospace Technology Group (HKG:1725) Is Making Moderate Use Of Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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 Hong Kong Aerospace Technology Group Limited (HKG:1725) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Hong Kong Aerospace Technology Group

How Much Debt Does Hong Kong Aerospace Technology Group Carry?

The image below, which you can click on for greater detail, shows that at December 2022 Hong Kong Aerospace Technology Group had debt of CN¥390.7m, up from CN¥202.6m in one year. However, it does have CN¥41.7m in cash offsetting this, leading to net debt of about CN¥349.0m.

How Healthy Is Hong Kong Aerospace Technology Group's Balance Sheet?

The latest balance sheet data shows that Hong Kong Aerospace Technology Group had liabilities of CN¥622.6m due within a year, and liabilities of CN¥358.9m falling due after that. Offsetting these obligations, it had cash of CN¥41.7m as well as receivables valued at CN¥127.6m due within 12 months. So it has liabilities totalling CN¥812.2m more than its cash and near-term receivables, combined.

While this might seem like a lot, it is not so bad since Hong Kong Aerospace Technology Group has a market capitalization of CN¥2.42b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Hong Kong Aerospace Technology Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Hong Kong Aerospace Technology Group had a loss before interest and tax, and actually shrunk its revenue by 2.3%, to CN¥635m. We would much prefer see growth.

Caveat Emptor

Importantly, Hong Kong Aerospace Technology Group had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥135m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. We would feel better if it turned its trailing twelve month loss of CN¥154m into a profit. So we do think this stock is quite risky. 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. We've identified 2 warning signs with Hong Kong Aerospace Technology Group , and understanding them should be part of your investment process.

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.