Is CSMall Group (HKG:1815) Using Debt In A Risky Way?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We note that CSMall Group Limited (HKG:1815) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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 CSMall Group

How Much Debt Does CSMall Group Carry?

As you can see below, CSMall Group had CN¥132.6m of debt, at June 2024, which is about the same as the year before. You can click the chart for greater detail. But it also has CN¥431.5m in cash to offset that, meaning it has CN¥298.9m net cash.

How Healthy Is CSMall Group's Balance Sheet?

The latest balance sheet data shows that CSMall Group had liabilities of CN¥284.4m due within a year, and liabilities of CN¥2.35m falling due after that. Offsetting this, it had CN¥431.5m in cash and CN¥156.5m in receivables that were due within 12 months. So it actually has CN¥301.3m more liquid assets than total liabilities.

This luscious liquidity implies that CSMall Group's balance sheet is sturdy like a giant sequoia tree. On this view, lenders should feel as safe as the beloved of a black-belt karate master. Simply put, the fact that CSMall Group has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since CSMall 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 CSMall Group had a loss before interest and tax, and actually shrunk its revenue by 67%, to CN¥381m. That makes us nervous, to say the least.

So How Risky Is CSMall Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that CSMall Group had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of CN¥38m and booked a CN¥31m accounting loss. But the saving grace is the CN¥298.9m on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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. These risks can be hard to spot. Every company has them, and we've spotted 3 warning signs for CSMall Group (of which 1 is a bit concerning!) you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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

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.