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. We can see that Shaanxi Aerospace Power Hi-Tech Co., Ltd. (SHSE:600343) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth 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 Shaanxi Aerospace Power Hi-Tech's Net Debt?

The image below, which you can click on for greater detail, shows that at March 2024 Shaanxi Aerospace Power Hi-Tech had debt of CN¥442.0m, up from CN¥374.0m in one year. On the flip side, it has CN¥220.1m in cash leading to net debt of about CN¥221.9m.

How Healthy Is Shaanxi Aerospace Power Hi-Tech's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Shaanxi Aerospace Power Hi-Tech had liabilities of CN¥1.15b due within 12 months and liabilities of CN¥241.3m due beyond that. On the other hand, it had cash of CN¥220.1m and CN¥720.6m worth of receivables due within a year. So its liabilities total CN¥445.8m more than the combination of its cash and short-term receivables.

Given Shaanxi Aerospace Power Hi-Tech has a market capitalization of CN¥5.58b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Shaanxi Aerospace Power Hi-Tech'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.

In the last year Shaanxi Aerospace Power Hi-Tech had a loss before interest and tax, and actually shrunk its revenue by 23%, to CN¥914m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Shaanxi Aerospace Power Hi-Tech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥191m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥271m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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 - Shaanxi Aerospace Power Hi-Tech has 2 warning signs we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.