Is Guangshen Railway (HKG:525) Using Too Much 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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. 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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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. If things get really bad, the lenders can take control of the business. 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. When we think about a company's use of debt, we first look at cash and debt together.

What Is Guangshen Railway's Debt?

You can click the graphic below for the historical numbers, but it shows that Guangshen Railway had CN¥200.2m of debt in June 2025, down from CN¥1.89b, one year before. However, its balance sheet shows it holds CN¥2.93b in cash, so it actually has CN¥2.73b net cash.

A Look At Guangshen Railway's Liabilities

The latest balance sheet data shows that Guangshen Railway had liabilities of CN¥6.83b due within a year, and liabilities of CN¥2.11b falling due after that. Offsetting these obligations, it had cash of CN¥2.93b as well as receivables valued at CN¥6.92b due within 12 months. So it actually has CN¥914.1m 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. Succinctly put, Guangshen Railway boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for Guangshen Railway

But the bad news is that Guangshen Railway has seen its EBIT plunge 16% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Guangshen Railway's ability to maintain a healthy balance sheet going forward. 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. During the last two years, Guangshen Railway generated free cash flow amounting to a very robust 83% of its EBIT, more than we'd expect. That puts it in a very strong position to pay down debt.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that Guangshen Railway has net cash of CN¥2.73b, as well as more liquid assets than liabilities. The cherry on top was that in converted 83% of that EBIT to free cash flow, bringing in CN¥2.2b. So we are not troubled with Guangshen Railway's debt use. 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. 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.