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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, Aerosun Corporation (SHSE:600501) does carry debt. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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 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 Aerosun's Debt?

You can click the graphic below for the historical numbers, but it shows that Aerosun had CN¥115.5m of debt in June 2024, down from CN¥697.6m, one year before. But it also has CN¥210.9m in cash to offset that, meaning it has CN¥95.4m net cash.

A Look At Aerosun's Liabilities

The latest balance sheet data shows that Aerosun had liabilities of CN¥2.78b due within a year, and liabilities of CN¥36.7m falling due after that. On the other hand, it had cash of CN¥210.9m and CN¥2.00b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥605.6m.

Given Aerosun has a market capitalization of CN¥6.76b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Aerosun boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is Aerosun'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.

Over 12 months, Aerosun made a loss at the EBIT level, and saw its revenue drop to CN¥3.1b, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is Aerosun?

Although Aerosun had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥186m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. 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 1 warning sign for Aerosun that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.