These 4 Measures Indicate That CIMC Enric Holdings (HKG:3899) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that CIMC Enric Holdings Limited (HKG:3899) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for CIMC Enric Holdings

What Is CIMC Enric Holdings's Debt?

As you can see below, at the end of June 2023, CIMC Enric Holdings had CN¥2.60b of debt, up from CN¥2.08b a year ago. Click the image for more detail. However, it does have CN¥6.73b in cash offsetting this, leading to net cash of CN¥4.12b.

A Look At CIMC Enric Holdings' Liabilities

According to the last reported balance sheet, CIMC Enric Holdings had liabilities of CN¥11.4b due within 12 months, and liabilities of CN¥2.40b due beyond 12 months. Offsetting these obligations, it had cash of CN¥6.73b as well as receivables valued at CN¥5.28b due within 12 months. So its liabilities total CN¥1.77b more than the combination of its cash and short-term receivables.

Since publicly traded CIMC Enric Holdings shares are worth a total of CN¥13.2b, 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. While it does have liabilities worth noting, CIMC Enric Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

The good news is that CIMC Enric Holdings has increased its EBIT by 9.1% over twelve months, which should ease any concerns about debt repayment. When analysing debt levels, the balance sheet is the obvious place to start. 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. 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 74% 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¥4.12b. And it impressed us with free cash flow of CN¥1.1b, being 74% of its EBIT. So is CIMC Enric Holdings's debt a risk? It doesn't seem so to us. 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. Be aware that CIMC Enric Holdings is showing 1 warning sign in our investment analysis , you should know about...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.

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.