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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Aerospace Intelligent Manufacturing Technology Co., Ltd. (SZSE:300446) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Aerospace Intelligent Manufacturing Technology's Debt?

As you can see below, Aerospace Intelligent Manufacturing Technology had CN¥84.0m of debt at September 2024, down from CN¥132.4m a year prior. But it also has CN¥2.38b in cash to offset that, meaning it has CN¥2.30b net cash.

How Healthy Is Aerospace Intelligent Manufacturing Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Aerospace Intelligent Manufacturing Technology had liabilities of CN¥3.21b due within 12 months and liabilities of CN¥375.2m due beyond that. Offsetting these obligations, it had cash of CN¥2.38b as well as receivables valued at CN¥2.16b due within 12 months. So it can boast CN¥958.3m more liquid assets than total liabilities.

This surplus suggests that Aerospace Intelligent Manufacturing Technology has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Aerospace Intelligent Manufacturing Technology has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Aerospace Intelligent Manufacturing Technology grew its EBIT by 51% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. But it is Aerospace Intelligent Manufacturing Technology'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. While Aerospace Intelligent Manufacturing Technology 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. During the last three years, Aerospace Intelligent Manufacturing Technology produced sturdy free cash flow equating to 65% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Aerospace Intelligent Manufacturing Technology has net cash of CN¥2.30b, as well as more liquid assets than liabilities. And we liked the look of last year's 51% year-on-year EBIT growth. So we don't think Aerospace Intelligent Manufacturing Technology's use of debt is risky. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for Aerospace Intelligent Manufacturing Technology you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.