Is Century Sunshine Group Holdings (HKG:509) Weighed On By Its Debt Load?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 Century Sunshine Group Holdings Limited (HKG:509) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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 Century Sunshine Group Holdings

What Is Century Sunshine Group Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that Century Sunshine Group Holdings had HK$1.94b of debt in June 2023, down from HK$2.06b, one year before. However, it does have HK$75.6m in cash offsetting this, leading to net debt of about HK$1.86b.

How Strong Is Century Sunshine Group Holdings' Balance Sheet?

The latest balance sheet data shows that Century Sunshine Group Holdings had liabilities of HK$2.74b due within a year, and liabilities of HK$459.7m falling due after that. Offsetting these obligations, it had cash of HK$75.6m as well as receivables valued at HK$33.6m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by HK$3.10b.

The deficiency here weighs heavily on the HK$68.7m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we'd watch its balance sheet closely, without a doubt. After all, Century Sunshine Group Holdings would likely require a major re-capitalisation if it had to pay its creditors today. There's no doubt that we learn most about debt from the balance sheet. But it is Century Sunshine Group Holdings's earnings that will influence how the balance sheet holds up in the future. 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 Century Sunshine Group Holdings had a loss before interest and tax, and actually shrunk its revenue by 63%, to HK$314m. To be frank that doesn't bode well.

Caveat Emptor

Not only did Century Sunshine Group Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable HK$395m at the EBIT level. Reflecting on this and the significant total liabilities, it's hard to know what to say about the stock because of our intense dis-affinity for it. Sure, the company might have a nice story about how they are going on to a brighter future. But the fact is that it incinerated HK$18m of cash in the last twelve months, and has precious few liquid assets in comparison to its liabilities. So we consider this a high risk stock, and we're worried its share price could sink faster than than a dingy with a great white shark attacking it. 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 3 warning signs with Century Sunshine Group Holdings , 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.