A-Sonic Aerospace (SGX:BTJ) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. Importantly, A-Sonic Aerospace Limited (SGX:BTJ) does carry debt. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for A-Sonic Aerospace

How Much Debt Does A-Sonic Aerospace Carry?

The image below, which you can click on for greater detail, shows that A-Sonic Aerospace had debt of US$1.76m at the end of December 2020, a reduction from US$4.29m over a year. But it also has US$30.6m in cash to offset that, meaning it has US$28.9m net cash.

How Strong Is A-Sonic Aerospace's Balance Sheet?

We can see from the most recent balance sheet that A-Sonic Aerospace had liabilities of US$43.9m falling due within a year, and liabilities of US$348.0k due beyond that. Offsetting this, it had US$30.6m in cash and US$41.1m in receivables that were due within 12 months. So it can boast US$27.5m more liquid assets than total liabilities.

This surplus liquidity suggests that A-Sonic Aerospace's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Succinctly put, A-Sonic Aerospace boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, A-Sonic Aerospace grew its EBIT by 173% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. But it is A-Sonic Aerospace'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. A-Sonic Aerospace 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. Over the most recent three years, A-Sonic Aerospace recorded free cash flow worth 76% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case A-Sonic Aerospace has US$28.9m in net cash and a strong balance sheet. And it impressed us with its EBIT growth of 173% over the last year. At the end of the day we're not concerned about A-Sonic Aerospace's debt. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 3 warning signs for A-Sonic Aerospace 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.

If you’re looking to trade A-Sonic Aerospace, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.