The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. We can see that CSMall Group Limited (HKG:1815) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CSMall Group

How Much Debt Does CSMall Group Carry?

The image below, which you can click on for greater detail, shows that at June 2022 CSMall Group had debt of CN¥100.7m, up from CN¥12.9m in one year. However, it does have CN¥379.4m in cash offsetting this, leading to net cash of CN¥278.7m.

How Strong Is CSMall Group's Balance Sheet?

According to the last reported balance sheet, CSMall Group had liabilities of CN¥230.0m due within 12 months, and liabilities of CN¥3.46m due beyond 12 months. Offsetting this, it had CN¥379.4m in cash and CN¥100.2m in receivables that were due within 12 months. So it actually has CN¥246.2m more liquid assets than total liabilities.

This surplus liquidity suggests that CSMall Group's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. Having regard to this fact, we think its balance sheet is as strong as an ox. Simply put, the fact that CSMall Group has more cash than debt is arguably a good indication that it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is CSMall 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 CSMall Group wasn't profitable at an EBIT level, but managed to grow its revenue by 184%, to CN¥987m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is CSMall Group?

While CSMall Group lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥268m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. We think its revenue growth of 184% is a good sign. We'd see further strong growth as an optimistic indication. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. We've identified 2 warning signs with CSMall Group (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

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.