Is CSSC Offshore & Marine Engineering (Group) (HKG:317) A Risky Investment?

Warren Buffett famously said, '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. 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?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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 examine debt levels, we first consider both cash and debt levels, together.

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

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

You can click the graphic below for the historical numbers, but it shows that CSSC Offshore & Marine Engineering (Group) had CN¥5.03b of debt in March 2024, down from CN¥5.43b, one year before. However, its balance sheet shows it holds CN¥12.8b in cash, so it actually has CN¥7.79b net cash.

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

According to the last reported balance sheet, CSSC Offshore & Marine Engineering (Group) had liabilities of CN¥24.7b due within 12 months, and liabilities of CN¥5.24b due beyond 12 months. Offsetting these obligations, it had cash of CN¥12.8b as well as receivables valued at CN¥4.76b due within 12 months. So its liabilities total CN¥12.3b more than the combination of its cash and short-term receivables.

While this might seem like a lot, it is not so bad since CSSC Offshore & Marine Engineering (Group) has a market capitalization of CN¥31.3b, and so it could probably strengthen its balance sheet by raising capital if it needed to. 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! 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 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¥17b, which is a gain of 26%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

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¥90m. 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. 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 1 warning sign for CSSC Offshore & Marine Engineering (Group) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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