Is CSSC Science& Technology (SHSE:600072) A Risky Investment?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CSSC Science& Technology Co., Ltd (SHSE:600072) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for CSSC Science& Technology

What Is CSSC Science& Technology's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CSSC Science& Technology had CN¥22.1b of debt, an increase on CN¥17.6b, over one year. However, it also had CN¥7.31b in cash, and so its net debt is CN¥14.8b.

How Healthy Is CSSC Science& Technology's Balance Sheet?

The latest balance sheet data shows that CSSC Science& Technology had liabilities of CN¥16.6b due within a year, and liabilities of CN¥21.4b falling due after that. Offsetting this, it had CN¥7.31b in cash and CN¥13.2b in receivables that were due within 12 months. So it has liabilities totalling CN¥17.5b more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of CN¥22.5b, so it does suggest shareholders should keep an eye on CSSC Science& Technology's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is CSSC Science& Technology's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Over 12 months, CSSC Science& Technology made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 19%. That's not what we would hope to see.

Caveat Emptor

Not only did CSSC Science& Technology's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost CN¥553m at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled CN¥5.8b in negative free cash flow over the last twelve months. So suffice it to say we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - CSSC Science& Technology has 1 warning sign we think you should be aware of.

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.

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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.