CSSC Offshore & Marine Engineering (Group) (HKG:317) Has Debt But No Earnings; Should You Worry?

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 CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CSSC Offshore & Marine Engineering (Group)

What Is CSSC Offshore & Marine Engineering (Group)'s Net Debt?

The image below, which you can click on for greater detail, shows that CSSC Offshore & Marine Engineering (Group) had debt of CN¥5.73b at the end of June 2021, a reduction from CN¥7.71b over a year. But it also has CN¥7.52b in cash to offset that, meaning it has CN¥1.79b net cash.

A Look At CSSC Offshore & Marine Engineering (Group)'s Liabilities

Zooming in on the latest balance sheet data, we can see that CSSC Offshore & Marine Engineering (Group) had liabilities of CN¥16.2b due within 12 months and liabilities of CN¥3.36b due beyond that. Offsetting this, it had CN¥7.52b in cash and CN¥5.95b in receivables that were due within 12 months. So it has liabilities totalling CN¥6.12b more than its cash and near-term receivables, combined.

This deficit isn't so bad because CSSC Offshore & Marine Engineering (Group) is worth CN¥21.5b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, CSSC Offshore & Marine Engineering (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is CSSC Offshore & Marine Engineering (Group)'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, CSSC Offshore & Marine Engineering (Group) made a loss at the EBIT level, and saw its revenue drop to CN¥12b, which is a fall of 34%. To be frank that doesn't bode well.

So How Risky Is CSSC Offshore & Marine Engineering (Group)?

While CSSC Offshore & Marine Engineering (Group) lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥464m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. 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. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for CSSC Offshore & Marine Engineering (Group) 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.
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