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. We note that Ligeance Aerospace Technology Co.,Ltd. (SZSE:000697) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Ligeance Aerospace TechnologyLtd's Debt?

As you can see below, at the end of September 2024, Ligeance Aerospace TechnologyLtd had CN¥2.57b of debt, up from CN¥2.24b a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥96.9m, its net debt is less, at about CN¥2.47b.

How Healthy Is Ligeance Aerospace TechnologyLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Ligeance Aerospace TechnologyLtd had liabilities of CN¥1.94b due within 12 months and liabilities of CN¥1.21b due beyond that. Offsetting these obligations, it had cash of CN¥96.9m as well as receivables valued at CN¥503.2m due within 12 months. So its liabilities total CN¥2.55b more than the combination of its cash and short-term receivables.

Ligeance Aerospace TechnologyLtd has a market capitalization of CN¥8.80b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Ligeance Aerospace TechnologyLtd will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, Ligeance Aerospace TechnologyLtd reported revenue of CN¥1.8b, which is a gain of 29%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

Caveat Emptor

Despite the top line growth, Ligeance Aerospace TechnologyLtd still had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥65m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥9.1m of cash over the last year. 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 Ligeance Aerospace TechnologyLtd has 2 warning signs (and 1 which can't be ignored) we think you should know about.

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.