Is CSP (NASDAQ:CSPI) 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 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. We note that CSP Inc. (NASDAQ:CSPI) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. 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.

See our latest analysis for CSP

What Is CSP's Debt?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 CSP had US$4.17m of debt, an increase on US$1.96m, over one year. But on the other hand it also has US$30.6m in cash, leading to a US$26.4m net cash position.

How Strong Is CSP's Balance Sheet?

According to the last reported balance sheet, CSP had liabilities of US$18.7m due within 12 months, and liabilities of US$3.48m due beyond 12 months. Offsetting these obligations, it had cash of US$30.6m as well as receivables valued at US$20.6m due within 12 months. So it actually has US$29.0m more liquid assets than total liabilities.

This excess liquidity suggests that CSP is taking a careful approach to debt. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, CSP boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But it is CSP'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, CSP made a loss at the EBIT level, and saw its revenue drop to US$55m, which is a fall of 15%. We would much prefer see growth.

So How Risky Is CSP?

While CSP lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow US$4.0m. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. With mediocre revenue growth in the last year, we're don't find the investment opportunity particularly compelling. 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. For example, we've discovered 1 warning sign for CSP 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. 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.