We Think CIMC Vehicles (Group) (SZSE:301039) Can Stay On Top Of Its Debt

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that CIMC Vehicles (Group) Co., Ltd. (SZSE:301039) does use debt in its business. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

Check out our latest analysis for CIMC Vehicles (Group)

What Is CIMC Vehicles (Group)'s Debt?

You can click the graphic below for the historical numbers, but it shows that as of March 2024 CIMC Vehicles (Group) had CN¥895.2m of debt, an increase on CN¥826.5m, over one year. But it also has CN¥6.54b in cash to offset that, meaning it has CN¥5.65b net cash.

A Look At CIMC Vehicles (Group)'s Liabilities

We can see from the most recent balance sheet that CIMC Vehicles (Group) had liabilities of CN¥8.50b falling due within a year, and liabilities of CN¥626.4m due beyond that. Offsetting these obligations, it had cash of CN¥6.54b as well as receivables valued at CN¥5.33b due within 12 months. So it can boast CN¥2.75b more liquid assets than total liabilities.

It's good to see that CIMC Vehicles (Group) has plenty of liquidity on its balance sheet, suggesting conservative management of liabilities. Due to its strong net asset position, it is not likely to face issues with its lenders. Succinctly put, CIMC Vehicles (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

The good news is that CIMC Vehicles (Group) has increased its EBIT by 4.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. But it is future earnings, more than anything, that will determine CIMC Vehicles (Group)'s ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CIMC Vehicles (Group) 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. Looking at the most recent three years, CIMC Vehicles (Group) recorded free cash flow of 38% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

While we empathize with investors who find debt concerning, you should keep in mind that CIMC Vehicles (Group) has net cash of CN¥5.65b, as well as more liquid assets than liabilities. And it also grew its EBIT by 4.1% over the last year. So is CIMC Vehicles (Group)'s debt a risk? It doesn't seem so to us. 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. To that end, you should be aware of the 1 warning sign we've spotted with CIMC Vehicles (Group) .

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com