We Think China High-Speed Railway Technology (SZSE:000008) Has A Fair Chunk Of Debt

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. Importantly, China High-Speed Railway Technology Co., Ltd. (SZSE:000008) does carry debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for China High-Speed Railway Technology

What Is China High-Speed Railway Technology's Debt?

As you can see below, China High-Speed Railway Technology had CN¥3.90b of debt, at September 2024, which is about the same as the year before. You can click the chart for greater detail. However, it also had CN¥585.7m in cash, and so its net debt is CN¥3.31b.

How Strong Is China High-Speed Railway Technology's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that China High-Speed Railway Technology had liabilities of CN¥6.21b due within 12 months and liabilities of CN¥746.6m due beyond that. On the other hand, it had cash of CN¥585.7m and CN¥2.78b worth of receivables due within a year. So its liabilities total CN¥3.60b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because China High-Speed Railway Technology is worth CN¥8.64b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since China High-Speed Railway Technology 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, China High-Speed Railway Technology reported revenue of CN¥2.3b, which is a gain of 7.5%, although it did not report any earnings before interest and tax. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Importantly, China High-Speed Railway Technology had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥425m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥7.7m in negative free cash flow over the last twelve months. So suffice it to say we do consider the stock to be risky. 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. For instance, we've identified 1 warning sign for China High-Speed Railway Technology that you should be aware of.

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.