Would China High-Speed Railway Technology (SZSE:000008) Be Better Off With Less Debt?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. As with many other companies China High-Speed Railway Technology Co., Ltd. (SZSE:000008) makes use of debt. But should shareholders be worried about its use of debt?

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. 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 China High-Speed Railway Technology's Net Debt?

The chart below, which you can click on for greater detail, shows that China High-Speed Railway Technology had CN¥3.90b in debt in September 2024; about the same as the year before. 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 it has liabilities totalling CN¥3.60b more than its cash and near-term receivables, combined.

China High-Speed Railway Technology has a market capitalization of CN¥7.20b, so it could very likely raise cash to ameliorate 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 it is China High-Speed Railway 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.

See our latest analysis for China High-Speed Railway Technology

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. 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¥7.7m of cash over the last year. So to be blunt we think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that China High-Speed Railway Technology is showing 1 warning sign in our investment analysis , you should know about...

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.