These 4 Measures Indicate That BII Railway Transportation Technology Holdings (HKG:1522) Is Using Debt Reasonably Well

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, BII Railway Transportation Technology Holdings Company Limited (HKG:1522) does carry debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its 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$331.4m of debt at December 2023, down from HK$383.9m a year prior. But on the other hand it also has HK$697.1m in cash, leading to a HK$365.7m net cash position.

A Look At BII Railway Transportation Technology Holdings' Liabilities

The latest balance sheet data shows that BII Railway Transportation Technology Holdings had liabilities of HK$1.56b due within a year, and liabilities of HK$69.2m falling due after that. On the other hand, it had cash of HK$697.1m and HK$1.80b worth of receivables due within a year. So it actually has HK$864.7m 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. On this view, lenders should feel as safe as the beloved of a black-belt karate master. 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.

And we also note warmly that BII Railway Transportation Technology Holdings grew its EBIT by 11% last year, making its debt load easier to handle. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While BII Railway Transportation Technology Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, BII Railway Transportation Technology Holdings saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

While we empathize with investors who find debt concerning, the bottom line is that BII Railway Transportation Technology Holdings has net cash of HK$365.7m and plenty of liquid assets. On top of that, it increased its EBIT by 11% in the last twelve months. So we don't think BII Railway Transportation Technology Holdings's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for BII Railway Transportation Technology Holdings you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com