Is CIMC Enric Holdings (HKG:3899) Using Too Much 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.' 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. Importantly, CIMC Enric Holdings Limited (HKG:3899) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

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 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. 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

What Is CIMC Enric Holdings's Net Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2022 CIMC Enric Holdings had CN¥2.00b of debt, an increase on CN¥1.84b, over one year. However, it does have CN¥5.26b in cash offsetting this, leading to net cash of CN¥3.26b.

A Look At CIMC Enric Holdings' Liabilities

Zooming in on the latest balance sheet data, we can see that CIMC Enric Holdings had liabilities of CN¥10.5b due within 12 months and liabilities of CN¥2.15b due beyond that. Offsetting this, it had CN¥5.26b in cash and CN¥4.73b in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥2.69b.

CIMC Enric Holdings has a market capitalization of CN¥12.6b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, CIMC Enric Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

While CIMC Enric Holdings doesn't seem to have gained much on the EBIT line, at least earnings remain stable for now. 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 Enric Holdings can strengthen its balance sheet over time. 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. CIMC Enric Holdings 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. Over the most recent three years, CIMC Enric Holdings recorded free cash flow worth 77% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

While CIMC Enric Holdings does have more liabilities than liquid assets, it also has net cash of CN¥3.26b. And it impressed us with free cash flow of CN¥2.1b, being 77% of its EBIT. So is CIMC Enric Holdings'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. For instance, we've identified 1 warning sign for CIMC Enric Holdings that 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.