Is CSMall Group (HKG:1815) Weighed On By Its Debt Load?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. We can see that CSMall Group Limited (HKG:1815) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CSMall Group

How Much Debt Does CSMall Group Carry?

As you can see below, at the end of December 2023, CSMall Group had CN¥127.7m of debt, up from CN¥111.8m a year ago. Click the image for more detail. But on the other hand it also has CN¥419.5m in cash, leading to a CN¥291.8m net cash position.

How Healthy Is CSMall Group's Balance Sheet?

According to the last reported balance sheet, CSMall Group had liabilities of CN¥255.7m due within 12 months, and liabilities of CN¥3.50m due beyond 12 months. Offsetting these obligations, it had cash of CN¥419.5m as well as receivables valued at CN¥150.3m due within 12 months. So it can boast CN¥310.6m more liquid assets than total liabilities.

This luscious liquidity implies that CSMall Group's balance sheet is sturdy like a giant sequoia tree. 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 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.

Over 12 months, CSMall Group made a loss at the EBIT level, and saw its revenue drop to CN¥501m, which is a fall of 72%. That makes us nervous, to say the least.

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¥94m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. There's no doubt the next few years will be crucial to how the business matures. 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 CSMall Group (of which 1 is significant!) 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.