Here's Why Guangshen Railway (HKG:525) Can Afford Some Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that Guangshen Railway Company Limited (HKG:525) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Guangshen Railway

How Much Debt Does Guangshen Railway Carry?

As you can see below, at the end of December 2022, Guangshen Railway had CN¥1.50b of debt, up from none a year ago. Click the image for more detail. However, because it has a cash reserve of CN¥1.47b, its net debt is less, at about CN¥24.4m.

How Strong Is Guangshen Railway's Balance Sheet?

The latest balance sheet data shows that Guangshen Railway had liabilities of CN¥8.89b due within a year, and liabilities of CN¥2.90b falling due after that. Offsetting this, it had CN¥1.47b in cash and CN¥5.12b in receivables that were due within 12 months. So its liabilities total CN¥5.20b more than the combination of its cash and short-term receivables.

Guangshen Railway has a market capitalization of CN¥17.7b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, Guangshen Railway has a very light debt load indeed. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Guangshen Railway's revenue was pretty flat, and it made a negative EBIT. While that hardly impresses, its not too bad either.

Caveat Emptor

Over the last twelve months Guangshen Railway produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping CN¥2.6b. 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¥1.8b of cash over the last year. So suffice it to say we consider the stock very risky. For riskier companies like Guangshen Railway I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.