Does CSMall Group (HKG:1815) Have A Healthy Balance Sheet?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 CSMall Group Limited (HKG:1815) does use debt in its business. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CSMall Group

What Is CSMall Group's Net Debt?

The image below, which you can click on for greater detail, shows that at June 2022 CSMall Group had debt of CN¥100.7m, up from CN¥12.9m in one year. However, its balance sheet shows it holds CN¥379.4m in cash, so it actually has CN¥278.7m net cash.

How Healthy Is CSMall Group's Balance Sheet?

According to the last reported balance sheet, CSMall Group had liabilities of CN¥230.0m due within 12 months, and liabilities of CN¥3.46m due beyond 12 months. Offsetting this, it had CN¥379.4m in cash and CN¥100.2m in receivables that were due within 12 months. So it actually has CN¥246.2m more liquid assets than total liabilities.

This excess liquidity is a great indication that CSMall Group's balance sheet is almost as strong as Fort Knox. Having regard to this fact, we think its balance sheet is as strong as an ox. Succinctly put, CSMall 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 it is CSMall Group'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 CSMall Group wasn't profitable at an EBIT level, but managed to grow its revenue by 184%, to CN¥987m. So its pretty obvious shareholders are hoping for more growth!

So How Risky Is CSMall Group?

Although CSMall Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of CN¥268m. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. Given it also grew revenue by 184% over the last year, we think there's a good chance the company is on track. So this may well be an interesting business to watch grow. 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. Case in point: We've spotted 2 warning signs for CSMall Group you should be aware of, and 1 of them makes us a bit uncomfortable.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.