Is CSC Holdings (SGX:C06) A Risky Investment?

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. Importantly, CSC Holdings Limited (SGX:C06) does carry debt. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CSC Holdings

What Is CSC Holdings's Debt?

As you can see below, CSC Holdings had S$64.2m of debt, at September 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have S$19.9m in cash offsetting this, leading to net debt of about S$44.2m.

How Strong Is CSC Holdings' Balance Sheet?

According to the last reported balance sheet, CSC Holdings had liabilities of S$154.1m due within 12 months, and liabilities of S$72.6m due beyond 12 months. Offsetting this, it had S$19.9m in cash and S$113.9m in receivables that were due within 12 months. So it has liabilities totalling S$92.9m more than its cash and near-term receivables, combined.

This deficit casts a shadow over the S$28.1m company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. After all, CSC Holdings would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. 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.

In the last year CSC Holdings wasn't profitable at an EBIT level, but managed to grow its revenue by 6.1%, to S$264m. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

Caveat Emptor

Over the last twelve months CSC Holdings produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable S$18m at the EBIT level. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely since it is low on liquid assets, and made a loss of S$16m in the last year. So while it's not wise to assume the company will fail, we do think it's risky. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. We've identified 2 warning signs with CSC Holdings (at least 1 which is a bit unpleasant) , and understanding them should be part of your investment process.

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. 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.