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. Importantly, CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is CSSC Offshore & Marine Engineering (Group)'s Debt?

The image below, which you can click on for greater detail, shows that CSSC Offshore & Marine Engineering (Group) had debt of CN¥5.03b at the end of March 2024, a reduction from CN¥5.43b over a year. However, its balance sheet shows it holds CN¥12.8b in cash, so it actually has CN¥7.79b net cash.

How Strong Is CSSC Offshore & Marine Engineering (Group)'s Balance Sheet?

According to the last reported balance sheet, CSSC Offshore & Marine Engineering (Group) had liabilities of CN¥24.7b due within 12 months, and liabilities of CN¥5.24b due beyond 12 months. Offsetting these obligations, it had cash of CN¥12.8b as well as receivables valued at CN¥4.76b due within 12 months. So its liabilities total CN¥12.3b more than the combination of its cash and short-term receivables.

CSSC Offshore & Marine Engineering (Group) has a market capitalization of CN¥32.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. While it does have liabilities worth noting, CSSC Offshore & Marine Engineering (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is CSSC Offshore & Marine Engineering (Group)'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.

In the last year CSSC Offshore & Marine Engineering (Group) wasn't profitable at an EBIT level, but managed to grow its revenue by 26%, to CN¥17b. Shareholders probably have their fingers crossed that it can grow its way to profits.

So How Risky Is CSSC Offshore & Marine Engineering (Group)?

Although CSSC Offshore & Marine Engineering (Group) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥90m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for CSSC Offshore & Marine Engineering (Group) shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But that doesn't change our opinion that the stock is risky. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for CSSC Offshore & Marine Engineering (Group) that you should be aware of before investing here.

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. 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.

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