China Railway Hi-tech Industry (SHSE:600528) Has A Somewhat Strained Balance Sheet

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.' 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. Importantly, China Railway Hi-tech Industry Corporation Limited (SHSE:600528) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for China Railway Hi-tech Industry

How Much Debt Does China Railway Hi-tech Industry Carry?

You can click the graphic below for the historical numbers, but it shows that China Railway Hi-tech Industry had CN¥197.7m of debt in March 2024, down from CN¥325.5m, one year before. But on the other hand it also has CN¥5.22b in cash, leading to a CN¥5.02b net cash position.

How Healthy Is China Railway Hi-tech Industry's Balance Sheet?

The latest balance sheet data shows that China Railway Hi-tech Industry had liabilities of CN¥31.5b due within a year, and liabilities of CN¥709.4m falling due after that. Offsetting these obligations, it had cash of CN¥5.22b as well as receivables valued at CN¥18.1b due within 12 months. So its liabilities total CN¥8.90b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China Railway Hi-tech Industry is worth CN¥17.4b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, China Railway Hi-tech Industry also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that China Railway Hi-tech Industry has increased its EBIT by 2.4% over twelve months, which should ease any concerns about debt repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But it is China Railway Hi-tech Industry'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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. China Railway Hi-tech Industry may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, China Railway Hi-tech Industry recorded negative free cash flow, in total. Debt is usually more expensive, and almost always more risky in the hands of a company with negative free cash flow. Shareholders ought to hope for an improvement.

Summing Up

Although China Railway Hi-tech Industry's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥5.02b. And it also grew its EBIT by 2.4% over the last year. So while China Railway Hi-tech Industry does not have a great balance sheet, it's certainly not too bad. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for China Railway Hi-tech Industry that you should be aware of.

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.

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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.