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. As with many other companies AVIC Airborne Systems Co., Ltd. (SHSE:600372) makes use of debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

How Much Debt Does AVIC Airborne Systems Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 AVIC Airborne Systems had CN¥8.40b of debt, an increase on CN¥6.65b, over one year. However, it does have CN¥13.3b in cash offsetting this, leading to net cash of CN¥4.89b.

How Strong Is AVIC Airborne Systems' Balance Sheet?

The latest balance sheet data shows that AVIC Airborne Systems had liabilities of CN¥31.6b due within a year, and liabilities of CN¥4.36b falling due after that. Offsetting this, it had CN¥13.3b in cash and CN¥27.9b in receivables that were due within 12 months. So it can boast CN¥5.28b more liquid assets than total liabilities.

This short term liquidity is a sign that AVIC Airborne Systems could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that AVIC Airborne Systems has more cash than debt is arguably a good indication that it can manage its debt safely.

On the other hand, AVIC Airborne Systems's EBIT dived 17%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. 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 AVIC Airborne Systems'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, a company can only pay off debt with cold hard cash, not accounting profits. AVIC Airborne Systems 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 three years, AVIC Airborne Systems burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that AVIC Airborne Systems has net cash of CN¥4.89b, as well as more liquid assets than liabilities. So we don't have any problem with AVIC Airborne Systems's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for AVIC Airborne Systems that 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.

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