Does CSSC Offshore & Marine Engineering (Group) (HKG:317) have a healthy balance sheet?
Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it seems smart money knows that debt – which is usually involved in bankruptcies – is a very important factor when you’re assessing a company’s risk. We can see that CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) uses debt in its business. But the more important question is: what risk does this debt create?
When is debt a problem?
Debt helps a business until the business struggles to pay it back, either with new capital or with free cash flow. In the worst case, a company can go bankrupt if it cannot pay its creditors. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, the advantage of debt is that it often represents cheap capital, especially when it replaces dilution in a business with the ability to reinvest at high rates of return. When we think about a company’s use of debt, we first look at cash and debt together.
See our latest analysis for CSSC Offshore & Marine Engineering (Group)
What is the net debt of CSSC Offshore & Marine Engineering (Group)?
As you can see below, CSSC Offshore & Marine Engineering (Group) had a debt of 6.16 billion yen in September 2021, compared to 7.25 billion yen the previous year. However, he has 7.56 billion Canadian yen in cash to offset this, which translates to net cash of 1.40 billion Canadian yen.
How healthy is the CSSC Offshore & Marine Engineering (Group) balance sheet?
We can see from the most recent balance sheet that CSSC Offshore & Marine Engineering (Group) had liabilities of 17.2 billion yen coming due within one year, and liabilities of 3.62 billion yen due beyond. In compensation for these obligations, it had cash of 7.56 billion yen as well as receivables valued at 5.74 billion yen due within 12 months. Thus, its liabilities total 7.51 billion Canadian yen more than the combination of its cash and short-term receivables.
This shortfall is not that bad as CSSC Offshore & Marine Engineering (Group) is worth C$22.3 billion and therefore could probably raise enough capital to shore up its balance sheet, should the need arise. But it is clear that it must be carefully examined whether he can manage his debt without dilution. Despite its notable liabilities, CSSC Offshore & Marine Engineering (Group) has a net cash position, so it is fair to say that it is not very leveraged! There is no doubt that we learn the most about debt from the balance sheet. But you can’t look at debt in total isolation; since CSSC Offshore & Marine Engineering (Group) will need income to repay this debt. So, if you want to know more about its earnings, it might be worth checking out this graph of its long-term trend.
Over the past year, CSSC Offshore & Marine Engineering (Group) recorded a loss before interest and taxes and actually reduced its revenue by 24% to 12 billion yen. To be honest, that doesn’t bode well.
So how risky is CSSC Offshore & Marine Engineering (Group)?
While CSSC Offshore & Marine Engineering (Group) lost money in earnings before interest and tax (EBIT), it actually recorded a paper profit of 350 million Canadian yen. So taking that at face value, and considering the money, we don’t think it’s very risky in the short term. Until we see a positive EBIT, we are a little cautious on the stock, especially given the rather modest revenue growth. When analyzing debt levels, the balance sheet is the obvious starting point. However, not all investment risks reside on the balance sheet, far from it. We have identified 3 warning signs with CSSC Offshore & Marine Engineering (Group), and understanding them should be part of your investment process.
Of course, if you’re the type of investor who prefers to buy stocks without the burden of debt, then feel free to check out our exclusive list of cash-efficient growth stocks today.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.