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

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies CSSC Offshore & Marine Engineering (Group) Company Limited (HKG:317) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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.

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

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

You can click the graphic below for the historical numbers, but it shows that CSSC Offshore & Marine Engineering (Group) had CN¥6.10b of debt in March 2021, down from CN¥7.61b, one year before. But it also has CN¥9.06b in cash to offset that, meaning it has CN¥2.96b 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¥17.5b due within a year, and liabilities of CN¥3.03b falling due after that. Offsetting these obligations, it had cash of CN¥9.06b as well as receivables valued at CN¥5.85b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥5.61b.

CSSC Offshore & Marine Engineering (Group) has a market capitalization of CN¥20.4b, 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. 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. 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 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 48%, to CN¥11b. 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¥419m. 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. 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. To that end, you should be aware of the 2 warning signs we've spotted with CSSC Offshore & Marine Engineering (Group) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. 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.
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