AIA Engineering (NSE:AIAENG) Has A Rock Solid Balance Sheet

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.' 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. Importantly, AIA Engineering Limited (NSE:AIAENG) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. 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.

See our latest analysis for AIA Engineering

What Is AIA Engineering's Debt?

As you can see below, AIA Engineering had ₹4.79b of debt, at September 2023, which is about the same as the year before. You can click the chart for greater detail. But on the other hand it also has ₹34.1b in cash, leading to a ₹29.3b net cash position.

How Healthy Is AIA Engineering's Balance Sheet?

According to the last reported balance sheet, AIA Engineering had liabilities of ₹9.62b due within 12 months, and liabilities of ₹630.0m due beyond 12 months. On the other hand, it had cash of ₹34.1b and ₹8.93b worth of receivables due within a year. So it can boast ₹32.8b more liquid assets than total liabilities.

This short term liquidity is a sign that AIA Engineering could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, AIA Engineering boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that AIA Engineering has boosted its EBIT by 53%, thus reducing the spectre of future debt repayments. 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 AIA Engineering'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. AIA Engineering 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. In the last three years, AIA Engineering's free cash flow amounted to 41% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AIA Engineering has net cash of ₹29.3b, as well as more liquid assets than liabilities. And we liked the look of last year's 53% year-on-year EBIT growth. So we don't think AIA Engineering's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - AIA Engineering has 1 warning sign we think 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.