Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 Shaanxi Aerospace Power Hi-Tech Co., Ltd. (SHSE:600343) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Shaanxi Aerospace Power Hi-Tech's Net Debt?

The chart below, which you can click on for greater detail, shows that Shaanxi Aerospace Power Hi-Tech had CN¥412.0m in debt in September 2024; about the same as the year before. However, it also had CN¥104.1m in cash, and so its net debt is CN¥307.9m.

How Healthy Is Shaanxi Aerospace Power Hi-Tech's Balance Sheet?

According to the last reported balance sheet, Shaanxi Aerospace Power Hi-Tech had liabilities of CN¥1.14b due within 12 months, and liabilities of CN¥244.8m due beyond 12 months. On the other hand, it had cash of CN¥104.1m and CN¥737.7m worth of receivables due within a year. So it has liabilities totalling CN¥546.0m more than its cash and near-term receivables, combined.

Since publicly traded Shaanxi Aerospace Power Hi-Tech shares are worth a total of CN¥6.67b, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. 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 Shaanxi Aerospace Power Hi-Tech 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.

In the last year Shaanxi Aerospace Power Hi-Tech's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Importantly, Shaanxi Aerospace Power Hi-Tech had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥214m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥181m of cash over the last year. So to be blunt we think it is risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. To that end, you should be aware of the 2 warning signs 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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