Is CSG Smart Science&TechnologyLtd (SZSE:300222) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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. 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?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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.

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¥329.6m of debt at June 2024, down from CN¥689.0m a year prior. However, its balance sheet shows it holds CN¥655.7m in cash, so it actually has CN¥326.1m net cash.

A Look At CSG Smart Science&TechnologyLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that CSG Smart Science&TechnologyLtd had liabilities of CN¥2.66b due within 12 months and liabilities of CN¥350.7m due beyond that. Offsetting these obligations, it had cash of CN¥655.7m as well as receivables valued at CN¥1.84b due within 12 months. So it has liabilities totalling CN¥514.5m more than its cash and near-term receivables, combined.

Since publicly traded CSG Smart Science&TechnologyLtd shares are worth a total of CN¥5.88b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, CSG Smart Science&TechnologyLtd boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is CSG Smart Science&TechnologyLtd's earnings that will influence how the balance sheet holds up in the future. 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.

In the last year CSG Smart Science&TechnologyLtd had a loss before interest and tax, and actually shrunk its revenue by 9.7%, to CN¥3.0b. That's not what we would hope to see.

So How Risky Is CSG Smart Science&TechnologyLtd?

Although CSG Smart Science&TechnologyLtd had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥141m. 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. 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. Be aware that CSG Smart Science&TechnologyLtd is showing 1 warning sign in our investment analysis , you should know about...

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.