Chimimport AD (BUL:CHIM) Seems To Use Debt Quite Sensibly

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies Chimimport AD (BUL:CHIM) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Chimimport AD

What Is Chimimport AD's Debt?

As you can see below, Chimimport AD had лв228.5m of debt, at March 2021, which is about the same as the year before. You can click the chart for greater detail. However, it does have лв4.48b in cash offsetting this, leading to net cash of лв4.25b.

How Healthy Is Chimimport AD's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Chimimport AD had liabilities of лв525.1m due within 12 months and liabilities of лв8.65b due beyond that. On the other hand, it had cash of лв4.48b and лв3.26b worth of receivables due within a year. So its liabilities total лв1.43b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the лв192.6m company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Chimimport AD would likely require a major re-capitalisation if it had to pay its creditors today. Given that Chimimport AD has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total.

Pleasingly, Chimimport AD is growing its EBIT faster than former Australian PM Bob Hawke downs a yard glass, boasting a 143% gain in the last twelve months. 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 Chimimport AD will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Chimimport AD has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, Chimimport AD actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While Chimimport AD does have more liabilities than liquid assets, it also has net cash of лв4.25b. And it impressed us with free cash flow of лв603m, being 354% of its EBIT. So we are not troubled with Chimimport AD's debt use. 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. We've identified 1 warning sign with Chimimport AD , and understanding them should be part of your investment process.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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