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. As with many other companies CSG Smart Science&Technology Co.,Ltd. (SZSE:300222) makes use of debt. But is this debt a concern to shareholders?
What Risk Does Debt Bring?
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.
Check out our latest analysis for CSG Smart Science&TechnologyLtd
How Much Debt Does CSG Smart Science&TechnologyLtd Carry?
As you can see below, CSG Smart Science&TechnologyLtd had CN¥702.0m of debt at September 2023, down from CN¥761.1m a year prior. However, because it has a cash reserve of CN¥691.5m, its net debt is less, at about CN¥10.6m.
How Healthy Is CSG Smart Science&TechnologyLtd's Balance Sheet?
Zooming in on the latest balance sheet data, we can see that CSG Smart Science&TechnologyLtd had liabilities of CN¥3.23b due within 12 months and liabilities of CN¥449.0m due beyond 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 total CN¥886.4m more than the combination of its cash and short-term receivables.
Of course, CSG Smart Science&TechnologyLtd has a market capitalization of CN¥5.24b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. But either way, CSG Smart Science&TechnologyLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CSG Smart Science&TechnologyLtd will need earnings to service that debt. 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. To be specific the EBIT loss came in at CN¥254m. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through CN¥256m of cash over the last year. So suffice it to say we do consider the stock to be risky. For riskier companies like CSG Smart Science&TechnologyLtd I always like to keep an eye on the long term profit and revenue trends. Fortunately, you can click to see our interactive graph of its profit, revenue, and operating cashflow.
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.