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.’ 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 note that BII Railway Transportation Technology Holdings Company Limited (HKG:1522) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can’t fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for BII Railway Transportation Technology Holdings

How Much Debt Does BII Railway Transportation Technology Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2020 BII Railway Transportation Technology Holdings had HK$574.7m of debt, an increase on HK$58.1m, over one year. However, it does have HK$918.7m in cash offsetting this, leading to net cash of HK$344.0m.

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SEHK:1522 Debt to Equity History September 29th 2020

A Look At BII Railway Transportation Technology Holdings’s Liabilities

According to the last reported balance sheet, BII Railway Transportation Technology Holdings had liabilities of HK$1.05b due within 12 months, and liabilities of HK$681.3m due beyond 12 months. Offsetting these obligations, it had cash of HK$918.7m as well as receivables valued at HK$981.9m due within 12 months. So it actually has HK$172.3m more liquid assets than total liabilities.

It’s good to see that BII Railway Transportation Technology Holdings has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, BII Railway Transportation Technology Holdings boasts net cash, so it’s fair to say it does not have a heavy debt load!

On top of that, BII Railway Transportation Technology Holdings grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is BII Railway Transportation Technology Holdings’s earnings that will influence how the balance sheet holds up in the future. So if you’re keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. BII Railway Transportation Technology Holdings 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. Looking at the most recent three years, BII Railway Transportation Technology Holdings recorded free cash flow of 43% of its EBIT, which is weaker than we’d expect. That’s not great, when it comes to paying down debt.

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Summing up

While we empathize with investors who find debt concerning, you should keep in mind that BII Railway Transportation Technology Holdings has net cash of HK$344.0m, as well as more liquid assets than liabilities. And we liked the look of last year’s 42% year-on-year EBIT growth. So is BII Railway Transportation Technology Holdings’s debt a risk? It doesn’t seem so to us. 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. To that end, you should be aware of the 3 warning signs we’ve spotted with BII Railway Transportation Technology Holdings .

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. 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.
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