Is CSSC Offshore & Marine Engineering (Group) (HKG:317) Using Debt In A Risky Way?

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.' 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 is this debt a concern to shareholders?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

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

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

The image below, which you can click on for greater detail, shows that CSSC Offshore & Marine Engineering (Group) had debt of CN¥5.58b at the end of September 2023, a reduction from CN¥7.29b over a year. However, its balance sheet shows it holds CN¥13.8b in cash, so it actually has CN¥8.23b net cash.

How Strong 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¥24.9b due within a year, and liabilities of CN¥5.12b falling due after that. Offsetting this, it had CN¥13.8b in cash and CN¥5.07b in receivables that were due within 12 months. So it has liabilities totalling CN¥11.2b more than its cash and near-term receivables, combined.

CSSC Offshore & Marine Engineering (Group) has a market capitalization of CN¥26.0b, so it could very likely raise cash to ameliorate 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! The balance sheet is clearly the area to focus on when you are analysing debt. 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¥15b, 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)?

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¥689m. So taking that on face value, and considering the cash, we don't think its very risky in the near term. The good news for CSSC Offshore & Marine Engineering (Group) shareholders is that its revenue growth is strong, making it easier to raise capital if need be. But we still think it's somewhat risky. 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. We've identified 1 warning sign with CSSC Offshore & Marine Engineering (Group) , and understanding them should be part of your investment process.

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.