Health Check: How Prudently Does Crazy Sports Group (HKG:82) Use Debt?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies Crazy Sports Group Limited (HKG:82) makes use of debt. 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.

View our latest analysis for Crazy Sports Group

What Is Crazy Sports Group's Net Debt?

The image below, which you can click on for greater detail, shows that Crazy Sports Group had debt of HK$19.9m at the end of December 2023, a reduction from HK$34.0m over a year. But it also has HK$67.8m in cash to offset that, meaning it has HK$48.0m net cash.

How Strong Is Crazy Sports Group's Balance Sheet?

We can see from the most recent balance sheet that Crazy Sports Group had liabilities of HK$294.7m falling due within a year, and liabilities of HK$3.44m due beyond that. Offsetting this, it had HK$67.8m in cash and HK$131.5m in receivables that were due within 12 months. So it has liabilities totalling HK$98.8m more than its cash and near-term receivables, combined.

Since publicly traded Crazy Sports Group shares are worth a total of HK$520.5m, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, Crazy Sports Group boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since Crazy Sports 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 Crazy Sports Group had a loss before interest and tax, and actually shrunk its revenue by 30%, to HK$490m. To be frank that doesn't bode well.

So How Risky Is Crazy Sports Group?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months Crazy Sports Group lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through HK$4.2m of cash and made a loss of HK$23m. With only HK$48.0m on the balance sheet, it would appear that its going to need to raise capital again soon. Summing up, we're a little skeptical of this one, as it seems fairly risky in the absence of free cashflow. 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. Case in point: We've spotted 1 warning sign for Crazy Sports Group you should be aware of.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com