Is CSS HoldingsLtd (TYO:2304) A Risky Investment?

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. Importantly, CSS Holdings,Ltd. (TYO:2304) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CSS HoldingsLtd

What Is CSS HoldingsLtd's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 CSS HoldingsLtd had JP¥1.22b of debt, an increase on JP¥1.08b, over one year. However, it does have JP¥1.20b in cash offsetting this, leading to net debt of about JP¥16.0m.

How Healthy Is CSS HoldingsLtd's Balance Sheet?

We can see from the most recent balance sheet that CSS HoldingsLtd had liabilities of JP¥2.02b falling due within a year, and liabilities of JP¥1.01b due beyond that. On the other hand, it had cash of JP¥1.20b and JP¥1.40b worth of receivables due within a year. So it has liabilities totalling JP¥436.0m more than its cash and near-term receivables, combined.

CSS HoldingsLtd has a market capitalization of JP¥1.21b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. But either way, CSS HoldingsLtd has virtually no net debt, so it's fair to say it does not have a heavy debt load! 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 CSS HoldingsLtd 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.

Over 12 months, CSS HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to JP¥12b, which is a fall of 35%. That makes us nervous, to say the least.

Caveat Emptor

While CSS HoldingsLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Indeed, it lost a very considerable JP¥1.1b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. Surprisingly, we note that it actually reported positive free cash flow of JP¥318m and a profit of JP¥23m. So one might argue that there's still a chance it can get things on the right track. 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. For example, we've discovered 6 warning signs for CSS HoldingsLtd (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

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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