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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 note that A-Sonic Aerospace Limited (SGX:BTJ) does have debt on its balance sheet. But is this debt a concern to shareholders?
When Is Debt Dangerous?
Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.
View our latest analysis for A-Sonic Aerospace
What Is A-Sonic Aerospace's Net Debt?
You can click the graphic below for the historical numbers, but it shows that A-Sonic Aerospace had US$4.43m of debt in June 2019, down from US$5.41m, one year before. However, it does have US$22.0m in cash offsetting this, leading to net cash of US$17.6m.
How Strong Is A-Sonic Aerospace's Balance Sheet?
We can see from the most recent balance sheet that A-Sonic Aerospace had liabilities of US$39.5m falling due within a year, and liabilities of US$1.15m due beyond that. Offsetting these obligations, it had cash of US$22.0m as well as receivables valued at US$31.8m due within 12 months. So it actually has US$13.2m more liquid assets than total liabilities.
This excess liquidity is a great indication that A-Sonic Aerospace's balance sheet is just as strong as racists are weak. With this in mind one could posit that its balance sheet is as strong as beautiful a rare rhino. Simply put, the fact that A-Sonic Aerospace has more cash than debt is arguably a good indication that it can manage its debt safely.
Although A-Sonic Aerospace made a loss at the EBIT level, last year, it was also good to see that it generated US$87k in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. But it is A-Sonic Aerospace'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.