David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. Importantly, AviChina Industry & Technology Company Limited (HKG:2357) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. 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.

How Much Debt Does AviChina Industry & Technology Carry?

The image below, which you can click on for greater detail, shows that at December 2023 AviChina Industry & Technology had debt of CN¥12.3b, up from CN¥11.4b in one year. But on the other hand it also has CN¥40.5b in cash, leading to a CN¥28.1b net cash position.

A Look At AviChina Industry & Technology's Liabilities

Zooming in on the latest balance sheet data, we can see that AviChina Industry & Technology had liabilities of CN¥85.5b due within 12 months and liabilities of CN¥11.4b due beyond that. Offsetting this, it had CN¥40.5b in cash and CN¥56.2b in receivables that were due within 12 months. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that AviChina Industry & Technology's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥22.1b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, AviChina Industry & Technology also has more cash than debt, so we're pretty confident it can manage its debt safely.

In addition to that, we're happy to report that AviChina Industry & Technology has boosted its EBIT by 44%, 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 AviChina Industry & Technology'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, a company can only pay off debt with cold hard cash, not accounting profits. While AviChina Industry & Technology has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, AviChina Industry & Technology recorded free cash flow of 42% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about AviChina Industry & Technology's liabilities, but we can be reassured by the fact it has has net cash of CN¥28.1b. And we liked the look of last year's 44% year-on-year EBIT growth. So is AviChina Industry & Technology's debt a risk? It doesn't seem so to us. 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. For example - AviChina Industry & Technology 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.