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David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the 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. As with many other companies CSC Holdings Limited (SGX:C06) makes use of debt. But the more important question is: how much risk is that debt creating?
Why Does Debt Bring Risk?
Debt assists a business until the business has trouble paying it off, either with new capital or with free 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. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest 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 Debt?
As you can see below, at the end of June 2019, CSC Holdings had S$96.7m of debt, up from S$84.3m a year ago. Click the image for more detail. However, it also had S$14.7m in cash, and so its net debt is S$82.1m.
How Strong Is CSC Holdings's Balance Sheet?
According to the last reported balance sheet, CSC Holdings had liabilities of S$196.9m due within 12 months, and liabilities of S$27.6m due beyond 12 months. Offsetting these obligations, it had cash of S$14.7m as well as receivables valued at S$138.4m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by S$71.4m.
When you consider that this deficiency exceeds the company's S$49.0m market capitalization, you might well be inclined to review the balance sheet, just like one might study a new partner's social media. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive 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.
In the last year CSC Holdings actually shrunk its revenue by 5.9%, to S$322m. We would much prefer see growth.