Is CSSC Offshore & Marine Engineering (Group) (HKG:317) Using Debt Sensibly?

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.' 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. As with many other companies CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. 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)

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

The image below, which you can click on for greater detail, shows that at June 2022 CSSC Offshore & Marine Engineering (Group) had debt of CN¥7.16b, up from CN¥5.73b in one year. But it also has CN¥15.2b in cash to offset that, meaning it has CN¥8.04b net cash.

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¥27.5b falling due within a year, and liabilities of CN¥3.55b due beyond that. Offsetting these obligations, it had cash of CN¥15.2b as well as receivables valued at CN¥4.29b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥11.6b.

This deficit isn't so bad because CSSC Offshore & Marine Engineering (Group) is worth CN¥21.9b, 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CSSC Offshore & Marine Engineering (Group) had a loss before interest and tax, and actually shrunk its revenue by 6.7%, to CN¥11b. That's not what we would hope to see.

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

Although CSSC Offshore & Marine Engineering (Group) had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of CN¥193m. 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. 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. To that end, you should be aware of the 2 warning signs we've spotted with CSSC Offshore & Marine Engineering (Group) .

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.