Health Check: How Prudently Does CSG Smart Science&TechnologyLtd (SZSE:300222) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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. Importantly, CSG Smart Science&Technology Co.,Ltd. (SZSE:300222) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CSG Smart Science&TechnologyLtd

What Is CSG Smart Science&TechnologyLtd's Debt?

The image below, which you can click on for greater detail, shows that CSG Smart Science&TechnologyLtd had debt of CN¥382.2m at the end of September 2024, a reduction from CN¥702.0m over a year. However, it does have CN¥657.1m in cash offsetting this, leading to net cash of CN¥274.9m.

How Strong 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¥2.68b due within 12 months and liabilities of CN¥348.1m due beyond that. Offsetting this, it had CN¥657.1m in cash and CN¥1.83b in receivables that were due within 12 months. So its liabilities total CN¥541.0m more than the combination of its cash and short-term receivables.

Given CSG Smart Science&TechnologyLtd has a market capitalization of CN¥9.01b, it's hard to believe these liabilities pose much threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, CSG Smart Science&TechnologyLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. 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 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, CSG Smart Science&TechnologyLtd made a loss at the EBIT level, and saw its revenue drop to CN¥2.9b, which is a fall of 7.9%. That's not what we would hope to see.

So How Risky Is CSG Smart Science&TechnologyLtd?

While CSG Smart Science&TechnologyLtd lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow CN¥242m. 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. With revenue growth uninspiring, we'd really need to see some positive EBIT before mustering much enthusiasm for this business. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For instance, we've identified 1 warning sign for CSG Smart Science&TechnologyLtd that 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.