We Think Jiangsu Maixinlin Aviation Science and Technology (SHSE:688685) Is Taking Some Risk With Its Debt

Simply Wall St · 10/18 00:17

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. As with many other companies Jiangsu Maixinlin Aviation Science and Technology Corp. (SHSE:688685) makes use of debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Jiangsu Maixinlin Aviation Science and Technology

How Much Debt Does Jiangsu Maixinlin Aviation Science and Technology Carry?

As you can see below, at the end of June 2024, Jiangsu Maixinlin Aviation Science and Technology had CN¥709.8m of debt, up from CN¥11.0m a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥58.4m, its net debt is less, at about CN¥651.4m.

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SHSE:688685 Debt to Equity History October 18th 2024

A Look At Jiangsu Maixinlin Aviation Science and Technology's Liabilities

We can see from the most recent balance sheet that Jiangsu Maixinlin Aviation Science and Technology had liabilities of CN¥865.2m falling due within a year, and liabilities of CN¥123.8m due beyond that. On the other hand, it had cash of CN¥58.4m and CN¥254.0m worth of receivables due within a year. So it has liabilities totalling CN¥676.6m more than its cash and near-term receivables, combined.

Of course, Jiangsu Maixinlin Aviation Science and Technology has a market capitalization of CN¥5.62b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse.

We use two main ratios to inform us about debt levels relative to earnings. The first is net debt divided by earnings before interest, tax, depreciation, and amortization (EBITDA), while the second is how many times its earnings before interest and tax (EBIT) covers its interest expense (or its interest cover, for short). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

Jiangsu Maixinlin Aviation Science and Technology has a rather high debt to EBITDA ratio of 11.6 which suggests a meaningful debt load. But the good news is that it boasts fairly comforting interest cover of 4.2 times, suggesting it can responsibly service its obligations. Worse, Jiangsu Maixinlin Aviation Science and Technology's EBIT was down 25% over the last year. If earnings continue to follow that trajectory, paying off that debt load will be harder than convincing us to run a marathon in the rain. There's no doubt that we learn most about debt from the balance sheet. But it is Jiangsu Maixinlin Aviation Science and 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. So we clearly need to look at whether that EBIT is leading to corresponding free cash flow. During the last three years, Jiangsu Maixinlin Aviation Science and Technology burned a lot of cash. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Our View

To be frank both Jiangsu Maixinlin Aviation Science and Technology's conversion of EBIT to free cash flow and its track record of (not) growing its EBIT make us rather uncomfortable with its debt levels. But at least its level of total liabilities is not so bad. Overall, it seems to us that Jiangsu Maixinlin Aviation Science and Technology's balance sheet is really quite a risk to the business. For this reason we're pretty cautious about the stock, and we think shareholders should keep a close eye on its liquidity. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 4 warning signs for Jiangsu Maixinlin Aviation Science and Technology you should be aware of, and 3 of them are a bit concerning.

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.