Does CSP International Fashion Group (BIT:CSP) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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 note that CSP International Fashion Group S.p.A. (BIT:CSP) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. If things get really bad, the lenders can take control of the business. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for CSP International Fashion Group

What Is CSP International Fashion Group's Net Debt?

You can click the graphic below for the historical numbers, but it shows that CSP International Fashion Group had €10.8m of debt in December 2020, down from €15.9m, one year before. However, its balance sheet shows it holds €18.4m in cash, so it actually has €7.61m net cash.

How Strong Is CSP International Fashion Group's Balance Sheet?

We can see from the most recent balance sheet that CSP International Fashion Group had liabilities of €31.2m falling due within a year, and liabilities of €20.0m due beyond that. Offsetting this, it had €18.4m in cash and €18.5m in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €14.3m.

This is a mountain of leverage relative to its market capitalization of €15.7m. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, CSP International Fashion Group also has more cash than debt, so we're pretty confident it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CSP International Fashion Group will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year CSP International Fashion Group had a loss before interest and tax, and actually shrunk its revenue by 24%, to €83m. That makes us nervous, to say the least.

So How Risky Is CSP International Fashion Group?

Although CSP International Fashion Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it generated positive free cash flow of €1.1m. 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. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. 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. For example CSP International Fashion Group has 2 warning signs (and 1 which is a bit unpleasant) we think you should know about.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

If you’re looking to trade CSP International Fashion Group, open an account with the lowest-cost* platform trusted by professionals, Interactive Brokers. Their clients from over 200 countries and territories trade stocks, options, futures, forex, bonds and funds worldwide from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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