Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Aerospace Intelligent Manufacturing Technology Co., Ltd. (SZSE:300446) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Aerospace Intelligent Manufacturing Technology's Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 Aerospace Intelligent Manufacturing Technology had CN¥482.6m of debt, an increase on CN¥60.1m, over one year. But on the other hand it also has CN¥2.53b in cash, leading to a CN¥2.05b net cash position.

How Healthy Is Aerospace Intelligent Manufacturing Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aerospace Intelligent Manufacturing Technology had liabilities of CN¥3.79b due within 12 months and liabilities of CN¥345.4m due beyond that. On the other hand, it had cash of CN¥2.53b and CN¥2.63b worth of receivables due within a year. So it can boast CN¥1.02b more liquid assets than total liabilities.

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

Even more impressive was the fact that Aerospace Intelligent Manufacturing Technology grew its EBIT by 733% over twelve months. 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 you can't view debt in total isolation; since Aerospace Intelligent Manufacturing Technology will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Aerospace Intelligent Manufacturing Technology 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. During the last two years, Aerospace Intelligent Manufacturing Technology produced sturdy free cash flow equating to 51% 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 we empathize with investors who find debt concerning, you should keep in mind that Aerospace Intelligent Manufacturing Technology has net cash of CN¥2.05b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 733% over the last year. So is Aerospace Intelligent Manufacturing Technology'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 instance, we've identified 2 warning signs for Aerospace Intelligent Manufacturing Technology (1 can't be ignored) 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.

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