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.' 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, Chengdu ALD Aviation Manufacturing Corporation (SZSE:300696) does carry debt. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Chengdu ALD Aviation Manufacturing's Debt?
As you can see below, at the end of March 2024, Chengdu ALD Aviation Manufacturing had CN¥25.0m of debt, up from CN¥15.0m a year ago. Click the image for more detail. But it also has CN¥922.3m in cash to offset that, meaning it has CN¥897.3m net cash.
How Strong Is Chengdu ALD Aviation Manufacturing's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that Chengdu ALD Aviation Manufacturing had liabilities of CN¥112.2m due within 12 months and liabilities of CN¥61.5m due beyond that. Offsetting these obligations, it had cash of CN¥922.3m as well as receivables valued at CN¥347.1m due within 12 months. So it actually has CN¥1.10b more liquid assets than total liabilities.
This excess liquidity suggests that Chengdu ALD Aviation Manufacturing is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Chengdu ALD Aviation Manufacturing boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Chengdu ALD Aviation Manufacturing will need earnings to service that debt. 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.
Over 12 months, Chengdu ALD Aviation Manufacturing made a loss at the EBIT level, and saw its revenue drop to CN¥254m, which is a fall of 52%. That makes us nervous, to say the least.
So How Risky Is Chengdu ALD Aviation Manufacturing?
While Chengdu ALD Aviation Manufacturing lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥6.4m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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 - Chengdu ALD Aviation Manufacturing has 4 warning signs 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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