Century Sage Scientific Holdings (HKG:1450) Has Debt But No Earnings; Should You Worry?

Warren Buffett famously said, '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 can see that Century Sage Scientific Holdings Limited (HKG:1450) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Century Sage Scientific Holdings

What Is Century Sage Scientific Holdings's Net Debt?

The image below, which you can click on for greater detail, shows that at December 2020 Century Sage Scientific Holdings had debt of CN¥176.4m, up from CN¥158.7m in one year. However, it does have CN¥65.1m in cash offsetting this, leading to net debt of about CN¥111.4m.

A Look At Century Sage Scientific Holdings' Liabilities

We can see from the most recent balance sheet that Century Sage Scientific Holdings had liabilities of CN¥376.8m falling due within a year, and liabilities of CN¥16.0m due beyond that. Offsetting this, it had CN¥65.1m in cash and CN¥193.7m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥134.1m.

This deficit casts a shadow over the CN¥86.8m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, Century Sage Scientific Holdings would likely require a major re-capitalisation if it had to pay its creditors today. 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 Century Sage Scientific Holdings 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 Century Sage Scientific Holdings had a loss before interest and tax, and actually shrunk its revenue by 20%, to CN¥153m. We would much prefer see growth.

Caveat Emptor

Not only did Century Sage Scientific Holdings's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping CN¥50m. When we look at that alongside the significant liabilities, we're not particularly confident about the company. It would need to improve its operations quickly for us to be interested in it. For example, we would not want to see a repeat of last year's loss of CN¥98m. In the meantime, we consider the stock to be 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Century Sage Scientific Holdings (of which 1 makes us a bit uncomfortable!) you should know about.

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. 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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