Does CSSC Offshore & Marine Engineering (Group) (HKG:317) 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 can see that CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

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

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

As you can see below, CSSC Offshore & Marine Engineering (Group) had CN¥6.16b of debt at September 2021, down from CN¥7.25b a year prior. However, it does have CN¥7.56b in cash offsetting this, leading to net cash of CN¥1.40b.

How Healthy Is CSSC Offshore & Marine Engineering (Group)'s Balance Sheet?

We can see from the most recent balance sheet that CSSC Offshore & Marine Engineering (Group) had liabilities of CN¥17.2b falling due within a year, and liabilities of CN¥3.62b due beyond that. Offsetting these obligations, it had cash of CN¥7.56b as well as receivables valued at CN¥5.74b due within 12 months. So its liabilities total CN¥7.51b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because CSSC Offshore & Marine Engineering (Group) is worth CN¥22.3b, 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. Despite its noteworthy liabilities, CSSC Offshore & Marine Engineering (Group) boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CSSC Offshore & Marine Engineering (Group) 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.

In the last year CSSC Offshore & Marine Engineering (Group) had a loss before interest and tax, and actually shrunk its revenue by 24%, to CN¥12b. 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¥350m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. We've identified 3 warning signs with CSSC Offshore & Marine Engineering (Group) , and understanding them should be part of your investment process.

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.