Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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, Aerospace Intelligent Manufacturing Technology Co., Ltd. (SZSE:300446) does carry debt. But the real question is whether this debt is making the company risky.

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is Aerospace Intelligent Manufacturing Technology's Net 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 it also has CN¥2.53b in cash to offset that, meaning it has CN¥2.05b net cash.

A Look At Aerospace Intelligent Manufacturing Technology's Liabilities

According to the last reported balance sheet, Aerospace Intelligent Manufacturing Technology had liabilities of CN¥3.79b due within 12 months, and liabilities of CN¥345.4m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.53b as well as receivables valued at CN¥2.63b due within 12 months. 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. Simply put, the fact that Aerospace Intelligent Manufacturing Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

Another good sign is that Aerospace Intelligent Manufacturing Technology has been able to increase its EBIT by 29% in twelve months, making it easier to pay down debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Aerospace Intelligent Manufacturing Technology's earnings that will influence how the balance sheet holds up in the future. 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. While Aerospace Intelligent Manufacturing 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. During the last two years, Aerospace Intelligent Manufacturing Technology produced sturdy free cash flow equating to 54% 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 29% 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. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 3 warning signs for Aerospace Intelligent Manufacturing Technology that you should be aware of before investing here.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.