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 CSG Smart Science&Technology Co.,Ltd. (SZSE:300222) makes use of debt. But the real question is whether this debt is making the company risky.
Why Does Debt Bring Risk?
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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.
What Is CSG Smart Science&TechnologyLtd's Net Debt?
The image below, which you can click on for greater detail, shows that CSG Smart Science&TechnologyLtd had debt of CN¥702.0m at the end of September 2023, a reduction from CN¥761.1m over a year. However, it also had CN¥691.5m in cash, and so its net debt is CN¥10.6m.
How Strong Is CSG Smart Science&TechnologyLtd's Balance Sheet?
The latest balance sheet data shows that CSG Smart Science&TechnologyLtd had liabilities of CN¥3.23b due within a year, and liabilities of CN¥449.0m falling due after that. Offsetting these obligations, it had cash of CN¥691.5m as well as receivables valued at CN¥2.10b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥886.4m.
While this might seem like a lot, it is not so bad since CSG Smart Science&TechnologyLtd has a market capitalization of CN¥4.27b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Carrying virtually no net debt, CSG Smart Science&TechnologyLtd has a very light debt load indeed. The balance sheet is clearly the area to focus on when you are analysing debt. But it is CSG Smart Science&TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.
In the last year CSG Smart Science&TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 6.4%, to CN¥3.2b. We would much prefer see growth.
Caveat Emptor
Importantly, CSG Smart Science&TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last year. Indeed, it lost CN¥254m at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥256m in negative free cash flow over the last twelve months. So in short it's a really risky stock. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how CSG Smart Science&TechnologyLtd's profit, revenue, and operating cashflow have changed over the last few years.
Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.
Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.