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.' 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. As with many other companies China Railway Hi-tech Industry Corporation Limited (SHSE:600528) makes use of debt. But is this debt a concern to shareholders?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

What Is China Railway Hi-tech Industry's Net Debt?

You can click the graphic below for the historical numbers, but it shows that China Railway Hi-tech Industry had CN¥159.7m of debt in September 2024, down from CN¥214.8m, one year before. However, it does have CN¥4.91b in cash offsetting this, leading to net cash of CN¥4.75b.

A Look At China Railway Hi-tech Industry's Liabilities

Zooming in on the latest balance sheet data, we can see that China Railway Hi-tech Industry had liabilities of CN¥35.3b due within 12 months and liabilities of CN¥680.0m due beyond that. Offsetting these obligations, it had cash of CN¥4.91b as well as receivables valued at CN¥20.9b due within 12 months. So its liabilities total CN¥10.2b more than the combination of its cash and short-term receivables.

China Railway Hi-tech Industry has a market capitalization of CN¥17.9b, 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. Despite its noteworthy liabilities, China Railway Hi-tech Industry boasts net cash, so it's fair to say it does not have a heavy debt load!

On the other hand, China Railway Hi-tech Industry's EBIT dived 13%, over the last year. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since China Railway Hi-tech Industry will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. China Railway Hi-tech Industry 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. Over the last three years, China Railway Hi-tech Industry reported free cash flow worth 2.2% of its EBIT, which is really quite low. For us, cash conversion that low sparks a little paranoia about is ability to extinguish debt.

Summing Up

Although China Railway Hi-tech Industry's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of CN¥4.75b. So while China Railway Hi-tech Industry does not have a great balance sheet, it's certainly not too bad. 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. Case in point: We've spotted 2 warning signs for China Railway Hi-tech Industry you should be aware of, and 1 of them is concerning.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.