AIA Engineering (NSE:AIAENG) Has A Pretty Healthy Balance Sheet

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that AIA Engineering Limited (NSE:AIAENG) does have debt on its balance sheet. But is this debt a concern to shareholders?

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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. If things get really bad, the lenders can take control of the business. 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, 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 think about a company's use of debt, we first look at cash and debt together.

What Is AIA Engineering's Debt?

The image below, which you can click on for greater detail, shows that AIA Engineering had debt of ₹1.26b at the end of September 2024, a reduction from ₹4.84b over a year. However, it does have ₹33.1b in cash offsetting this, leading to net cash of ₹31.8b.

How Strong Is AIA Engineering's Balance Sheet?

We can see from the most recent balance sheet that AIA Engineering had liabilities of ₹4.66b falling due within a year, and liabilities of ₹875.9m due beyond that. Offsetting these obligations, it had cash of ₹33.1b as well as receivables valued at ₹7.61b due within 12 months. So it actually has ₹35.2b more liquid assets than total liabilities.

This surplus suggests that AIA Engineering has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, AIA Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

Check out our latest analysis for AIA Engineering

On the other hand, AIA Engineering's EBIT dived 16%, over the last year. 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 ultimately the future profitability of the business will decide if AIA Engineering 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, a company can only pay off debt with cold hard cash, not accounting profits. While AIA Engineering 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, AIA Engineering produced sturdy free cash flow equating to 58% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While it is always sensible to investigate a company's debt, in this case AIA Engineering has ₹31.8b in net cash and a decent-looking balance sheet. So we are not troubled with AIA Engineering's debt use. 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 AIA Engineering you should be aware of.

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.