Is Hong Kong Aerospace Technology Group (HKG:1725) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Hong Kong Aerospace Technology Group Limited (HKG:1725) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Hong Kong Aerospace Technology Group

What Is Hong Kong Aerospace Technology Group's Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2023 Hong Kong Aerospace Technology Group had CN¥511.3m of debt, an increase on CN¥417.5m, over one year. On the flip side, it has CN¥42.4m in cash leading to net debt of about CN¥469.0m.

A Look At Hong Kong Aerospace Technology Group's Liabilities

According to the last reported balance sheet, Hong Kong Aerospace Technology Group had liabilities of CN¥710.1m due within 12 months, and liabilities of CN¥238.9m due beyond 12 months. On the other hand, it had cash of CN¥42.4m and CN¥145.5m worth of receivables due within a year. So its liabilities total CN¥761.1m more than the combination of its cash and short-term receivables.

This deficit isn't so bad because Hong Kong Aerospace Technology Group is worth CN¥1.70b, and thus could probably raise enough capital to shore up 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. When analysing debt levels, the balance sheet is the obvious place to start. But it is Hong Kong Aerospace Technology Group's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, Hong Kong Aerospace Technology Group made a loss at the EBIT level, and saw its revenue drop to CN¥547m, which is a fall of 24%. That makes us nervous, to say the least.

Caveat Emptor

While Hong Kong Aerospace Technology Group's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping CN¥173m. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥265m of cash over the last year. So in short it's a really risky stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 3 warning signs for Hong Kong Aerospace Technology Group (2 are potentially serious) 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.