We Think CSS HoldingsLtd (TYO:2304) Has A Fair Chunk Of Debt

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.' 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. As with many other companies CSS Holdings,Ltd. (TYO:2304) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. 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?

The image below, which you can click on for greater detail, shows that at December 2020 CSS HoldingsLtd had debt of JP¥1.16b, up from JP¥1.02b in one year. However, because it has a cash reserve of JP¥1.01b, its net debt is less, at about JP¥155.0m.

A Look At CSS HoldingsLtd's Liabilities

According to the last reported balance sheet, CSS HoldingsLtd had liabilities of JP¥2.07b due within 12 months, and liabilities of JP¥953.0m due beyond 12 months. On the other hand, it had cash of JP¥1.01b and JP¥1.40b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by JP¥623.0m.

While this might seem like a lot, it is not so bad since CSS HoldingsLtd has a market capitalization of JP¥1.45b, and so it could probably strengthen its balance sheet by raising capital if it needed to. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. There's no doubt that we learn most about debt from the balance sheet. But it is CSS HoldingsLtd'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.

Over 12 months, CSS HoldingsLtd made a loss at the EBIT level, and saw its revenue drop to JP¥11b, which is a fall of 41%. That makes us nervous, to say the least.

Caveat Emptor

Not only did CSS HoldingsLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable JP¥1.3b at the EBIT level. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of JP¥181m. In the meantime, we consider the stock very risky. 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, we've discovered 4 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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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.
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