CIMC Enric Holdings (HKG:3899) Seems To Use Debt Quite Sensibly

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.' 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 CIMC Enric Holdings Limited (HKG:3899) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for CIMC Enric Holdings

How Much Debt Does CIMC Enric Holdings Carry?

You can click the graphic below for the historical numbers, but it shows that as of June 2024 CIMC Enric Holdings had CN¥3.08b of debt, an increase on CN¥2.60b, over one year. However, its balance sheet shows it holds CN¥9.66b in cash, so it actually has CN¥6.58b net cash.

How Strong Is CIMC Enric Holdings' Balance Sheet?

We can see from the most recent balance sheet that CIMC Enric Holdings had liabilities of CN¥15.4b falling due within a year, and liabilities of CN¥1.85b due beyond that. Offsetting this, it had CN¥9.66b in cash and CN¥6.50b in receivables that were due within 12 months. So its liabilities total CN¥1.07b more than the combination of its cash and short-term receivables.

Since publicly traded CIMC Enric Holdings shares are worth a total of CN¥11.0b, it seems unlikely that this level of liabilities would be a major threat. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. Despite its noteworthy liabilities, CIMC Enric Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

But the other side of the story is that CIMC Enric Holdings saw its EBIT decline by 3.2% 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 it is future earnings, more than anything, that will determine CIMC Enric Holdings'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, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While CIMC Enric Holdings 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. During the last three years, CIMC Enric Holdings generated free cash flow amounting to a very robust 92% of its EBIT, more than we'd expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While it is always sensible to look at a company's total liabilities, it is very reassuring that CIMC Enric Holdings has CN¥6.58b in net cash. The cherry on top was that in converted 92% of that EBIT to free cash flow, bringing in CN¥933m. So is CIMC Enric Holdings's debt a risk? It doesn't seem so to us. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for CIMC Enric Holdings that you should be aware of before investing here.

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.

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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.