We Think AIA Engineering (NSE:AIAENG) Can Manage Its Debt With Ease

Warren Buffett famously said, '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 AIA Engineering Limited (NSE:AIAENG) 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 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for AIA Engineering

What Is AIA Engineering's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 AIA Engineering had ₹4.61b of debt, an increase on ₹2.36b, over one year. But it also has ₹21.4b in cash to offset that, meaning it has ₹16.8b net cash.

A Look At AIA Engineering's Liabilities

According to the last reported balance sheet, AIA Engineering had liabilities of ₹8.83b due within 12 months, and liabilities of ₹431.0m due beyond 12 months. Offsetting this, it had ₹21.4b in cash and ₹8.73b in receivables that were due within 12 months. So it actually has ₹20.9b 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!

In addition to that, we're happy to report that AIA Engineering has boosted its EBIT by 46%, thus reducing the spectre of future debt repayments. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

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 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case AIA Engineering has ₹16.8b in net cash and a decent-looking balance sheet. And we liked the look of last year's 46% year-on-year EBIT growth. So is AIA Engineering's debt a risk? It doesn't seem so to us. 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 2 warning signs (and 1 which doesn't sit too well with us) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.