Is Capitalonline Data Service (SZSE:300846) Using Debt In A Risky Way?

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.' 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 note that Capitalonline Data Service Co., Ltd. (SZSE:300846) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Capitalonline Data Service

What Is Capitalonline Data Service's Debt?

As you can see below, at the end of March 2024, Capitalonline Data Service had CN¥607.1m of debt, up from CN¥581.5m a year ago. Click the image for more detail. But on the other hand it also has CN¥610.3m in cash, leading to a CN¥3.19m net cash position.

A Look At Capitalonline Data Service's Liabilities

According to the last reported balance sheet, Capitalonline Data Service had liabilities of CN¥1.00b due within 12 months, and liabilities of CN¥107.3m due beyond 12 months. On the other hand, it had cash of CN¥610.3m and CN¥356.6m worth of receivables due within a year. So it has liabilities totalling CN¥142.9m more than its cash and near-term receivables, combined.

Given Capitalonline Data Service has a market capitalization of CN¥4.92b, 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. Despite its noteworthy liabilities, Capitalonline Data Service boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Capitalonline Data Service will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Capitalonline Data Service wasn't profitable at an EBIT level, but managed to grow its revenue by 9.2%, to CN¥1.3b. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Capitalonline Data Service?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that Capitalonline Data Service had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥88m of cash and made a loss of CN¥329m. But the saving grace is the CN¥3.19m on the balance sheet. That means it could keep spending at its current rate for more than two years. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Capitalonline Data Service (of which 1 makes us a bit uncomfortable!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com