Is Guangshen Railway (HKG:525) A Risky Investment?

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Guangshen Railway Company Limited (HKG:525) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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.

See our latest analysis for Guangshen Railway

What Is Guangshen Railway's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2022 Guangshen Railway had CN¥700.0m of debt, an increase on none, over one year. However, its balance sheet shows it holds CN¥961.3m in cash, so it actually has CN¥261.3m net cash.

How Strong Is Guangshen Railway's Balance Sheet?

We can see from the most recent balance sheet that Guangshen Railway had liabilities of CN¥8.27b falling due within a year, and liabilities of CN¥2.83b due beyond that. On the other hand, it had cash of CN¥961.3m and CN¥5.84b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥4.30b.

Guangshen Railway has a market capitalization of CN¥13.8b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, Guangshen Railway also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 3.8%, to CN¥20b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Guangshen Railway?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Guangshen Railway had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥1.2b and booked a CN¥1.7b accounting loss. Given it only has net cash of CN¥261.3m, the company may need to raise more capital if it doesn't reach break-even soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Guangshen Railway's profit, revenue, and operating cashflow have changed over the last few years.

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.