BII Railway Transportation Technology Holdings (HKG:1522) Seems To Use Debt Rather Sparingly

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 BII Railway Transportation Technology Holdings Company Limited (HKG:1522) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for BII Railway Transportation Technology Holdings

What Is BII Railway Transportation Technology Holdings's Debt?

As you can see below, BII Railway Transportation Technology Holdings had HK$571.4m of debt, at December 2020, which is about the same as the year before. You can click the chart for greater detail. But it also has HK$1.20b in cash to offset that, meaning it has HK$632.2m net cash.

How Strong Is BII Railway Transportation Technology Holdings' Balance Sheet?

The latest balance sheet data shows that BII Railway Transportation Technology Holdings had liabilities of HK$1.65b due within a year, and liabilities of HK$89.6m falling due after that. Offsetting this, it had HK$1.20b in cash and HK$1.16b in receivables that were due within 12 months. So it can boast HK$617.9m more liquid assets than total liabilities.

This luscious liquidity implies that BII Railway Transportation Technology Holdings' balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, BII Railway Transportation Technology Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that BII Railway Transportation Technology Holdings grew its EBIT by 153% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But it is BII Railway Transportation Technology Holdings'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. 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. Over the last three years, BII Railway Transportation Technology Holdings actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

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$632.2m, as well as more liquid assets than liabilities. And it impressed us with free cash flow of HK$277m, being 109% of its EBIT. At the end of the day we're not concerned about BII Railway Transportation Technology Holdings's debt. 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 example, we've discovered 3 warning signs for BII Railway Transportation Technology Holdings that you should be aware of before investing here.

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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