Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 Shanghai Aerospace Automobile Electromechanical Co., Ltd. (SHSE:600151) does use debt in its business. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

What Is Shanghai Aerospace Automobile Electromechanical's Net Debt?

The image below, which you can click on for greater detail, shows that Shanghai Aerospace Automobile Electromechanical had debt of CN¥1.32b at the end of September 2024, a reduction from CN¥1.60b over a year. But on the other hand it also has CN¥1.38b in cash, leading to a CN¥57.6m net cash position.

A Look At Shanghai Aerospace Automobile Electromechanical's Liabilities

According to the last reported balance sheet, Shanghai Aerospace Automobile Electromechanical had liabilities of CN¥2.08b due within 12 months, and liabilities of CN¥1.28b due beyond 12 months. Offsetting these obligations, it had cash of CN¥1.38b as well as receivables valued at CN¥1.91b due within 12 months. So it has liabilities totalling CN¥80.0m more than its cash and near-term receivables, combined.

Having regard to Shanghai Aerospace Automobile Electromechanical's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥12.4b company is short on cash, but still worth keeping an eye on the balance sheet. Despite its noteworthy liabilities, Shanghai Aerospace Automobile Electromechanical 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 you can't view debt in total isolation; since Shanghai Aerospace Automobile Electromechanical 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, Shanghai Aerospace Automobile Electromechanical made a loss at the EBIT level, and saw its revenue drop to CN¥5.7b, which is a fall of 46%. That makes us nervous, to say the least.

So How Risky Is Shanghai Aerospace Automobile Electromechanical?

While Shanghai Aerospace Automobile Electromechanical lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥361m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. For riskier companies like Shanghai Aerospace Automobile Electromechanical I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

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.