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

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We can see that CIMC Vehicles (Group) Co., Ltd. (HKG:1839) does use debt in its business. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

View 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. However, its balance sheet shows it holds CN¥5.36b in cash, so it actually has CN¥4.54b net cash.

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

Zooming in on the latest balance sheet data, we can see that CIMC Vehicles (Group) had liabilities of CN¥8.47b due within 12 months 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 actually has 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 while it's hard to imagine that the CN¥22.2b company is struggling for cash, we still think it's worth monitoring its balance sheet. Succinctly put, CIMC Vehicles (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, CIMC Vehicles (Group) grew its EBIT by 113% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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. 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. 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 CIMC Vehicles (Group) , and understanding them should be part of your investment process.

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.