Guangshen Railway (HKG:525) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Guangshen Railway Company Limited (HKG:525) does use debt in its business. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

View our latest analysis for Guangshen Railway

How Much Debt Does Guangshen Railway Carry?

The image below, which you can click on for greater detail, shows that at September 2024 Guangshen Railway had debt of CN¥1.55b, up from CN¥1.49b in one year. But on the other hand it also has CN¥2.33b in cash, leading to a CN¥779.3m net cash position.

A Look At Guangshen Railway's Liabilities

We can see from the most recent balance sheet that Guangshen Railway had liabilities of CN¥6.86b falling due within a year, and liabilities of CN¥2.90b due beyond that. On the other hand, it had cash of CN¥2.33b and CN¥7.32b worth of receivables due within a year. So these liquid assets roughly match the total liabilities.

This state of affairs indicates that Guangshen Railway's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the CN¥21.6b company is struggling for cash, we still think it's worth monitoring its balance sheet. Despite its noteworthy liabilities, Guangshen Railway boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Guangshen Railway grew its EBIT by 1,348% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Guangshen Railway can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While Guangshen Railway 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. In the last two years, Guangshen Railway's free cash flow amounted to 36% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

We could understand if investors are concerned about Guangshen Railway's liabilities, but we can be reassured by the fact it has has net cash of CN¥779.3m. And it impressed us with its EBIT growth of 1,348% over the last year. So we don't think Guangshen Railway's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should be aware of the 1 warning sign we've spotted with Guangshen Railway .

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.