We Think CIMC Vehicles (Group) (HKG:1839) Can Stay On Top Of Its Debt

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 should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for CIMC Vehicles (Group)

What Is CIMC Vehicles (Group)'s Net Debt?

You can click the graphic below for the historical numbers, but it shows that CIMC Vehicles (Group) had CN¥1.30b of debt in September 2021, down from CN¥1.83b, one year before. However, it does have CN¥5.48b in cash offsetting this, leading to net cash of CN¥4.18b.

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

According to the last reported balance sheet, CIMC Vehicles (Group) had liabilities of CN¥9.98b due within 12 months, and liabilities of CN¥808.4m due beyond 12 months. Offsetting this, it had CN¥5.48b in cash and CN¥4.90b in receivables that were due within 12 months. So it has liabilities totalling CN¥399.1m more than its cash and near-term receivables, combined.

Of course, CIMC Vehicles (Group) has a market capitalization of CN¥17.7b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, CIMC Vehicles (Group) also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that CIMC Vehicles (Group) saw its EBIT decline by 2.0% over the last year. That sort of decline, if sustained, will obviously make debt harder to handle. There's no doubt that we learn most about debt from the balance sheet. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs 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 34% of its EBIT, less than we'd expect. That's not great, when it comes to paying down debt.

Summing up

We could understand if investors are concerned about CIMC Vehicles (Group)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥4.18b. So we are not troubled with CIMC Vehicles (Group)'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. For instance, we've identified 2 warning signs for CIMC Vehicles (Group) that you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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.

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