The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 note that Shaanxi Aerospace Power Hi-Tech Co., Ltd. (SHSE:600343) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.
When Is Debt A Problem?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for Shaanxi Aerospace Power Hi-Tech
What Is Shaanxi Aerospace Power Hi-Tech's Net Debt?
The image below, which you can click on for greater detail, shows that at September 2023 Shaanxi Aerospace Power Hi-Tech had debt of CN¥422.0m, up from CN¥364.0m in one year. However, it also had CN¥289.9m in cash, and so its net debt is CN¥132.1m.
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¥81.1m due beyond that. Offsetting this, it had CN¥289.9m in cash and CN¥644.9m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥299.8m.
Since publicly traded Shaanxi Aerospace Power Hi-Tech shares are worth a total of CN¥6.85b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. There's no doubt that we learn most about debt from the balance sheet. But it is Shaanxi Aerospace Power Hi-Tech's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.
Over 12 months, Shaanxi Aerospace Power Hi-Tech made a loss at the EBIT level, and saw its revenue drop to CN¥937m, which is a fall of 29%. That makes us nervous, to say the least.
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¥112m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥160m of cash over the last year. So to be blunt we think it is 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. To that end, you should be aware of the 1 warning sign we've spotted with Shaanxi Aerospace Power Hi-Tech .
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.
