Howard Marks said it well when he said that, rather than worrying about stock price volatility, “the possibility of permanent loss is the risk I worry about…and that every practical investor that I know is worried”. So it may be obvious that you need to take debt into account when thinking about the risk of a given stock, because too much debt can sink a business. Mostly, CIMC Vehicles (Group) Co., Ltd. (HKG:1839) is in debt. But the real question is whether this debt makes the business risky.
What risk does debt carry?
Debt is a tool to help businesses grow, but if a business is unable to repay its lenders, it exists at their mercy. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are mercilessly liquidated by their bankers. Although not too common, we often see companies in debt permanently diluting their shareholders because lenders force them to raise capital at a ridiculous price. Of course, debt can be an important tool in businesses, especially capital-intensive businesses. The first step when considering a company’s debt levels is to consider its cash and debt together.
Check out our latest analysis for CIMC Vehicles (Group)
What is the debt of CIMC Vehicles (Group)?
As you can see below, CIMC Vehicles (Group) had 1.30 billion yen in debt in September 2021, compared to 1.83 billion yen the previous year. However, his balance sheet shows that he holds 5.48 billion Canadian yen in cash, so he actually has net cash of 4.18 billion domestic yen.
How healthy is the CIMC Vehicles (Group) balance sheet?
The latest balance sheet data shows that CIMC Vehicles (Group) had liabilities of 9.98 billion yen maturing within one year, and liabilities of 808.4 million yen maturing thereafter. In return for these bonds, it had cash of 5.48 billion yen as well as receivables valued at 4.90 billion yen due within 12 months. It therefore has liabilities totaling 399.1 million Canadian yen more than its cash and short-term receivables, combined.
Of course, CIMC Vehicles (Group) has a market capitalization of 18.2 billion Canadian yen, so these liabilities are probably manageable. However, we think it’s worth keeping an eye on the strength of its balance sheet, as it can change over time. Despite significant liabilities, CIMC Vehicles (Group) has a net cash position, so it is fair to say that it is not heavily indebted!
But the other side of the coin is that CIMC Vehicles (Group) has seen its EBIT fall by 2.0% over the last year. If earnings continue to decline at this rate, the company could find it increasingly difficult to manage its debt. The balance sheet is clearly the area to focus on when analyzing debt. But ultimately, the future profitability of the business will decide whether 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 analyst earnings forecast report interesting.
Finally, while the taxman may love accounting profits, lenders only accept cash. CIMC Vehicles (Group) may have net cash on the balance sheet, but it is always interesting to see how well the company converts its earnings before interest and tax (EBIT) into free cash flow, as this will influence both its need of, and its ability to manage debt. Over the last three years, CIMC Vehicles (Group) has recorded a free cash flow of 34% of its EBIT, which is lower than expected. It’s not great when it comes to paying off debt.
While it’s always a good idea to look at a company’s total liabilities, it’s very reassuring that CIMC Vehicles (Group) has 4.18 billion yen in net cash. We are therefore not concerned about the use of CIMC Vehicles (Group) debt. The balance sheet is clearly the area to focus on when analyzing debt. But at the end of the day, every business can contain risks that exist outside of the balance sheet. For example, we found 1 warning sign for CIMC vehicles (Group) which you should be aware of before investing here.
If you are interested in investing in companies that can generate profits without the burden of debt, then check out this free list of growing companies that have net cash on the balance sheet.
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This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.