Would CSSC Science& Technology (SHSE:600072) Be Better Off With Less Debt?

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. As with many other companies CSSC Science& Technology Co., Ltd (SHSE:600072) makes use of debt. But the more important question is: how much risk is that debt creating?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for CSSC Science& Technology

How Much Debt Does CSSC Science& Technology Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 CSSC Science& Technology had CN¥20.0b of debt, an increase on CN¥774.4m, over one year. On the flip side, it has CN¥6.71b in cash leading to net debt of about CN¥13.3b.

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

We can see from the most recent balance sheet that CSSC Science& Technology had liabilities of CN¥21.3b falling due within a year, and liabilities of CN¥16.2b due beyond that. Offsetting these obligations, it had cash of CN¥6.71b as well as receivables valued at CN¥15.0b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥15.8b.

This deficit is considerable relative to its market capitalization of CN¥24.0b, so it does suggest shareholders should keep an eye on CSSC Science& Technology's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CSSC Science& Technology will need earnings to service that debt. 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.

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 44%. That makes us nervous, to say the least.

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). To be specific the EBIT loss came in at CN¥71m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much 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¥9.6b of cash over the last year. So suffice it to say we consider the stock very 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. To that end, you should learn about the 4 warning signs we've spotted with CSSC Science& Technology (including 3 which shouldn't be ignored) .

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.