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 Caissa Tosun Development Co.,Ltd. (SZSE:000796) does have debt on its balance sheet. But should shareholders be worried about its use of debt?
When Is Debt A Problem?
Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.
What Is Caissa Tosun DevelopmentLtd's Net Debt?
You can click the graphic below for the historical numbers, but it shows that Caissa Tosun DevelopmentLtd had CN¥256.1m of debt in March 2024, down from CN¥1.49b, one year before. But it also has CN¥973.1m in cash to offset that, meaning it has CN¥717.0m net cash.
How Strong Is Caissa Tosun DevelopmentLtd's Balance Sheet?
According to the last reported balance sheet, Caissa Tosun DevelopmentLtd had liabilities of CN¥946.0m due within 12 months, and liabilities of CN¥293.7m due beyond 12 months. Offsetting this, it had CN¥973.1m in cash and CN¥508.7m in receivables that were due within 12 months. So it can boast CN¥242.0m more liquid assets than total liabilities.
This surplus suggests that Caissa Tosun DevelopmentLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Caissa Tosun DevelopmentLtd has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Caissa Tosun DevelopmentLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.
Over 12 months, Caissa Tosun DevelopmentLtd reported revenue of CN¥666m, which is a gain of 142%, although it did not report any earnings before interest and tax. So its pretty obvious shareholders are hoping for more growth!
So How Risky Is Caissa Tosun DevelopmentLtd?
While Caissa Tosun DevelopmentLtd lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥636m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Keeping in mind its 142% revenue growth over the last year, we think there's a decent chance the company is on track. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that Caissa Tosun DevelopmentLtd is showing 3 warning signs in our investment analysis , you should know about...
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.