CSC Holdings (SGX:C06) Is Making Moderate Use Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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 note that CSC Holdings Limited (SGX:C06) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for CSC Holdings

What Is CSC Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2021 CSC Holdings had S$76.7m of debt, an increase on S$68.5m, over one year. However, it does have S$34.6m in cash offsetting this, leading to net debt of about S$42.0m.

A Look At CSC Holdings' Liabilities

The latest balance sheet data shows that CSC Holdings had liabilities of S$158.0m due within a year, and liabilities of S$19.8m falling due after that. Offsetting these obligations, it had cash of S$34.6m as well as receivables valued at S$109.5m due within 12 months. So it has liabilities totalling S$33.7m more than its cash and near-term receivables, combined.

This deficit is considerable relative to its market capitalization of S$49.9m, so it does suggest shareholders should keep an eye on CSC Holdings' use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since CSC Holdings 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, CSC Holdings made a loss at the EBIT level, and saw its revenue drop to S$178m, which is a fall of 48%. That makes us nervous, to say the least.

Caveat Emptor

Not only did CSC Holdings'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 S$11m 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. For example, we would not want to see a repeat of last year's loss of S$11m. 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. To that end, you should be aware of the 2 warning signs we've spotted with CSC Holdings .

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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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