Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 AIMA Technology Group CO., LTD (SHSE:603529) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

What Is AIMA Technology Group's Debt?

The image below, which you can click on for greater detail, shows that AIMA Technology Group had debt of CN¥1.70b at the end of March 2024, a reduction from CN¥2.08b over a year. But on the other hand it also has CN¥7.06b in cash, leading to a CN¥5.36b net cash position.

How Strong Is AIMA Technology Group's Balance Sheet?

We can see from the most recent balance sheet that AIMA Technology Group had liabilities of CN¥10.4b falling due within a year, and liabilities of CN¥2.06b due beyond that. Offsetting these obligations, it had cash of CN¥7.06b as well as receivables valued at CN¥437.5m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.00b.

AIMA Technology Group has a market capitalization of CN¥25.0b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. While it does have liabilities worth noting, AIMA Technology Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

On the other hand, AIMA Technology Group's EBIT dived 13%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine AIMA Technology Group's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While AIMA Technology Group 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. Happily for any shareholders, AIMA Technology Group actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

While AIMA Technology Group does have more liabilities than liquid assets, it also has net cash of CN¥5.36b. And it impressed us with free cash flow of -CN¥1.2b, being 131% of its EBIT. So we don't have any problem with AIMA Technology Group's use of debt. 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 1 warning sign for AIMA Technology Group that you should be aware of before investing here.

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.

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