Does Crazy Sports Group (HKG:82) Have A Healthy Balance Sheet?

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 Crazy Sports Group Limited (HKG:82) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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 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. The first step when considering a company's debt levels is to consider its cash and debt together.

Our analysis indicates that 82 is potentially undervalued!

What Is Crazy Sports Group's Debt?

As you can see below, at the end of June 2022, Crazy Sports Group had HK$23.4m of debt, up from HK$12.0m a year ago. Click the image for more detail. But it also has HK$84.4m in cash to offset that, meaning it has HK$61.0m net cash.

How Healthy Is Crazy Sports Group's Balance Sheet?

According to the last reported balance sheet, Crazy Sports Group had liabilities of HK$286.9m due within 12 months, and liabilities of HK$9.72m due beyond 12 months. Offsetting these obligations, it had cash of HK$84.4m as well as receivables valued at HK$186.3m due within 12 months. So its liabilities total HK$25.8m more than the combination of its cash and short-term receivables.

This state of affairs indicates that Crazy Sports Group's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So while it's hard to imagine that the HK$1.34b company is struggling for cash, we still think it's worth monitoring its balance sheet. While it does have liabilities worth noting, Crazy Sports Group also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the bad news is that Crazy Sports Group has seen its EBIT plunge 11% in the last twelve months. We think hat kind of performance, if repeated frequently, could well lead to difficulties for the stock. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Crazy Sports Group can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Crazy Sports Group may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, Crazy Sports Group saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Summing Up

We could understand if investors are concerned about Crazy Sports Group's liabilities, but we can be reassured by the fact it has has net cash of HK$61.0m. So we don't have any problem with Crazy Sports Group's use of debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Crazy Sports Group is showing 1 warning sign in our investment analysis , you should know about...

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. 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.