BII Railway Transportation Technology Holdings (HKG:1522) Has A Rock Solid 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.' 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. We note that BII Railway Transportation Technology Holdings Company Limited (HKG:1522) does have debt on its balance sheet. 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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for BII Railway Transportation Technology Holdings

What Is BII Railway Transportation Technology Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 BII Railway Transportation Technology Holdings had HK$574.7m of debt, an increase on HK$58.1m, over one year. But it also has HK$918.7m in cash to offset that, meaning it has HK$344.0m net cash.

How Healthy Is BII Railway Transportation Technology Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BII Railway Transportation Technology Holdings had liabilities of HK$1.05b due within 12 months and liabilities of HK$681.3m due beyond that. On the other hand, it had cash of HK$918.7m and HK$981.9m worth of receivables due within a year. So it actually has HK$172.3m more liquid assets than total liabilities.

This surplus suggests that BII Railway Transportation Technology Holdings has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that BII Railway Transportation Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, BII Railway Transportation Technology Holdings grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since BII Railway Transportation Technology Holdings will need earnings to service that debt. 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. BII Railway Transportation Technology Holdings 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. In the last three years, BII Railway Transportation Technology Holdings's free cash flow amounted to 43% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that BII Railway Transportation Technology Holdings has net cash of HK$344.0m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 42% over the last year. So is BII Railway Transportation Technology Holdings's debt a risk? It doesn't seem so to us. 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. Consider for instance, the ever-present spectre of investment risk. We've identified 3 warning signs with BII Railway Transportation Technology Holdings , and understanding them should be part of your investment process.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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This article by Simply Wall St is general in nature. 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.
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