CIMC Vehicles (Group) (HKG:1839) Has A Rock Solid Balance Sheet

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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. As with many other companies CIMC Vehicles (Group) Co., Ltd. (HKG:1839) makes use of debt. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

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. If things get really bad, the lenders can take control of the business. 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. 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 examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for CIMC Vehicles (Group)

How Much Debt Does CIMC Vehicles (Group) Carry?

As you can see below, CIMC Vehicles (Group) had CN¥826.5m of debt at March 2023, down from CN¥1.47b a year prior. But it also has CN¥5.36b in cash to offset that, meaning it has CN¥4.54b net cash.

How Strong Is CIMC Vehicles (Group)'s Balance Sheet?

We can see from the most recent balance sheet that CIMC Vehicles (Group) had liabilities of CN¥8.47b falling due within a year, and liabilities of CN¥754.8m due beyond that. Offsetting this, it had CN¥5.36b in cash and CN¥4.15b in receivables that were due within 12 months. So it can boast CN¥279.3m more liquid assets than total liabilities.

Having regard to CIMC Vehicles (Group)'s size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the CN¥23.3b company is short on cash, but still worth keeping an eye on the balance sheet. Succinctly put, CIMC Vehicles (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that CIMC Vehicles (Group) grew its EBIT by 113% over twelve months. If maintained that growth will make the debt even more manageable in the years ahead. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if CIMC Vehicles (Group) can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. CIMC Vehicles (Group) may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, CIMC Vehicles (Group)'s free cash flow amounted to 39% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

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¥4.54b, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 113% over the last year. So we don't think CIMC Vehicles (Group)'s use of debt is risky. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - CIMC Vehicles (Group) has 2 warning signs we think you should be aware of.

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.