Does Client Service International (SZSE:300663) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We note that Client Service International, Inc. (SZSE:300663) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Client Service International

What Is Client Service International's Debt?

You can click the graphic below for the historical numbers, but it shows that Client Service International had CN¥1.31b of debt in September 2024, down from CN¥1.42b, one year before. On the flip side, it has CN¥108.6m in cash leading to net debt of about CN¥1.20b.

How Healthy Is Client Service International's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Client Service International had liabilities of CN¥720.2m due within 12 months and liabilities of CN¥1.10b due beyond that. On the other hand, it had cash of CN¥108.6m and CN¥1.07b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥644.7m.

Of course, Client Service International has a market capitalization of CN¥8.85b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. When analysing debt levels, the balance sheet is the obvious place to start. But it is Client Service International'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.

Over 12 months, Client Service International made a loss at the EBIT level, and saw its revenue drop to CN¥1.2b, which is a fall of 2.4%. We would much prefer see growth.

Caveat Emptor

Importantly, Client Service International had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at CN¥42m. 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. We would feel better if it turned its trailing twelve month loss of CN¥121m into a profit. So we do think this stock is quite risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 2 warning signs for Client Service International you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.