These 4 Measures Indicate That CSS HoldingsLtd (TSE:2304) Is Using Debt Safely

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.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, CSS Holdings,Ltd. (TSE:2304) does carry debt. But the real question is whether this debt is making the company risky.

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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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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.

What Is CSS HoldingsLtd's Net Debt?

As you can see below, CSS HoldingsLtd had JP¥950.0m of debt at December 2024, down from JP¥1.15b a year prior. But on the other hand it also has JP¥1.15b in cash, leading to a JP¥202.0m net cash position.

How Strong Is CSS HoldingsLtd's Balance Sheet?

The latest balance sheet data shows that CSS HoldingsLtd had liabilities of JP¥3.35b due within a year, and liabilities of JP¥399.0m falling due after that. Offsetting these obligations, it had cash of JP¥1.15b as well as receivables valued at JP¥2.44b due within 12 months. So it has liabilities totalling JP¥158.0m more than its cash and near-term receivables, combined.

Given CSS HoldingsLtd has a market capitalization of JP¥4.23b, it's hard to believe these liabilities pose much threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. Despite its noteworthy liabilities, CSS HoldingsLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

See our latest analysis for CSS HoldingsLtd

In addition to that, we're happy to report that CSS HoldingsLtd has boosted its EBIT by 79%, thus reducing the spectre of future debt repayments. 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 when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CSS HoldingsLtd has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last two years, CSS HoldingsLtd recorded free cash flow worth a fulsome 80% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

We could understand if investors are concerned about CSS HoldingsLtd's liabilities, but we can be reassured by the fact it has has net cash of JP¥202.0m. The cherry on top was that in converted 80% of that EBIT to free cash flow, bringing in JP¥520m. So we don't think CSS HoldingsLtd's use of debt is risky. There's no doubt that we learn most about debt from the balance sheet. 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 CSS HoldingsLtd you should know about.

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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.