Does CSSC Offshore & Marine Engineering (Group) (HKG:317) Have A Healthy Balance Sheet?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. Importantly, CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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.

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

How Much Debt Does CSSC Offshore & Marine Engineering (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 CSSC Offshore & Marine Engineering (Group) had CN¥5.64b of debt, an increase on CN¥4.40b, over one year. However, its balance sheet shows it holds CN¥11.7b in cash, so it actually has CN¥6.02b net cash.

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

The latest balance sheet data shows that CSSC Offshore & Marine Engineering (Group) had liabilities of CN¥21.2b due within a year, and liabilities of CN¥7.27b falling due after that. Offsetting these obligations, it had cash of CN¥11.7b as well as receivables valued at CN¥5.62b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.2b.

This deficit isn't so bad because CSSC Offshore & Marine Engineering (Group) is worth CN¥29.3b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. 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! 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 CSSC Offshore & Marine Engineering (Group) 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.

Over 12 months, CSSC Offshore & Marine Engineering (Group) reported revenue of CN¥19b, which is a gain of 30%, although it did not report any earnings before interest and tax. Shareholders probably have their fingers crossed that it can grow its way to profits.

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¥182m. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. One positive is that CSSC Offshore & Marine Engineering (Group) is growing revenue apace, which makes it easier to sell a growth story and raise capital if need be. But we still think it's somewhat 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. We've identified 2 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.