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. We can see that BII Railway Transportation Technology Holdings Company Limited (HKG:1522) does use debt in its business. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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, 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for BII Railway Transportation Technology Holdings

What Is BII Railway Transportation Technology Holdings's Net Debt?

As you can see below, at the end of June 2019, BII Railway Transportation Technology Holdings had HK$58.1m of debt, up from none a year ago. Click the image for more detail. However, its balance sheet shows it holds HK$448.4m in cash, so it actually has HK$390.3m net cash.

How Healthy Is BII Railway Transportation Technology Holdings's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that BII Railway Transportation Technology Holdings had liabilities of HK$985.5m due within 12 months and liabilities of HK$267.1m due beyond that. Offsetting these obligations, it had cash of HK$448.4m as well as receivables valued at HK$998.0m due within 12 months. So it can boast HK$193.8m 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. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that BII Railway Transportation Technology Holdings has more cash than debt is arguably a good indication that it can manage its debt safely.

Even more impressive was the fact that BII Railway Transportation Technology Holdings grew its EBIT by 417% over twelve months. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since BII Railway Transportation Technology Holdings will need earnings to service that debt. 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.