Is Guangshen Railway (HKG:525) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies Guangshen Railway Company Limited (HKG:525) makes use of debt. But is this debt a concern to shareholders?

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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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

What Is Guangshen Railway's Net Debt?

The image below, which you can click on for greater detail, shows that Guangshen Railway had debt of CN¥567.0m at the end of March 2025, a reduction from CN¥1.88b over a year. But it also has CN¥2.40b in cash to offset that, meaning it has CN¥1.83b net cash.

How Strong Is Guangshen Railway's Balance Sheet?

According to the last reported balance sheet, Guangshen Railway had liabilities of CN¥5.98b due within 12 months, and liabilities of CN¥2.61b due beyond 12 months. On the other hand, it had cash of CN¥2.40b and CN¥6.81b worth of receivables due within a year. So it actually has CN¥617.9m more liquid assets than total liabilities.

This surplus suggests that Guangshen Railway has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Guangshen Railway has more cash than debt is arguably a good indication that it can manage its debt safely.

See our latest analysis for Guangshen Railway

It is just as well that Guangshen Railway's load is not too heavy, because its EBIT was down 22% over the last year. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. 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're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Guangshen Railway 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. During the last two years, Guangshen Railway generated free cash flow amounting to a very robust 82% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While it is always sensible to investigate a company's debt, in this case Guangshen Railway has CN¥1.83b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥1.4b. So we don't have any problem with Guangshen Railway's use of debt. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Guangshen Railway that you should be aware of before investing here.

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.