Stock Analysis

Is CSP (NASDAQ:CSPI) Using Debt Sensibly?

NasdaqGM:CSPI
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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 CSP Inc. (NASDAQ:CSPI) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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. 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 think about a company's use of debt, we first look at cash and debt together.

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What Is CSP's Debt?

You can click the graphic below for the historical numbers, but it shows that CSP had US$1.69m of debt in December 2020, down from US$3.40m, one year before. However, its balance sheet shows it holds US$19.9m in cash, so it actually has US$18.2m net cash.

debt-equity-history-analysis
NasdaqGM:CSPI Debt to Equity History April 29th 2021

How Healthy Is CSP's Balance Sheet?

The latest balance sheet data shows that CSP had liabilities of US$12.0m due within a year, and liabilities of US$9.83m falling due after that. Offsetting this, it had US$19.9m in cash and US$14.5m in receivables that were due within 12 months. So it can boast US$12.6m more liquid assets than total liabilities.

It's good to see that CSP has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Simply put, the fact that CSP has more cash than debt is arguably a good indication that it can manage its debt safely. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since CSP 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, CSP made a loss at the EBIT level, and saw its revenue drop to US$56m, which is a fall of 27%. To be frank that doesn't bode well.

So How Risky Is CSP?

Although CSP had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory profit of US$191k. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. We'll feel more comfortable with the stock once EBIT is positive, given the lacklustre revenue growth. 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. We've identified 6 warning signs with CSP (at least 1 which can't be ignored) , and understanding them should be part of your investment process.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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