David Iben put it well when he said, “Volatility is not a risk we care about. What matters to us is to avoid the permanent loss of capital. ‘ It is only natural to consider a company’s balance sheet when considering how risky it is, as debt is often involved when a business collapses. Like many other companies CIMC Enric Holdings Limited (HKG: 3899) uses debt. But does this debt worry shareholders?

When is debt a problem?

Debt helps a business until the business struggles to repay it, either with new capital or with free cash flow. An integral part of capitalism is the process of “creative destruction” where bankrupt companies are ruthlessly liquidated by their bankers. However, a more common (but still costly) situation is where a company has to dilute its shareholders at a cheap share price just to get its debt under control. By replacing dilution, however, debt can be a very good tool for companies that need capital to invest in growth at high rates of return. When we think of a business’s use of debt, we first look at cash flow and debt together.

See our latest analysis for CIMC Enric Holdings

What is the net debt of CIMC Enric Holdings?

You can click on the graph below for historical figures, but it shows that as of June 2021, CIMC Enric Holdings had a debt of CN 1.28 billion, an increase from CN 1.20 billion, over a year. However, it has CN 3.19 billion in cash offsetting this, which leads to a net cash position of CN 1.91 billion.

How healthy is CIMC Enric Holdings’ balance sheet?

We can see from the most recent balance sheet that CIMC Enric Holdings had CN 8.89 billion liabilities due within one year and CN 914.0 million liabilities due beyond. In compensation for these obligations, he had cash of CN 3.19 billion as well as receivables valued at CN 4.45 billion due within 12 months. Its liabilities therefore total CN 2.16 billion more than the combination of its cash and short-term receivables.

Considering that CIMC Enric Holdings has a market cap of CN Â¥ 15.4b, it is hard to believe that these liabilities pose a significant threat. Having said that, it is clear that we must continue to monitor his record lest it get worse. Despite its notable liabilities, CIMC Enric Holdings has a net cash flow, so it’s fair to say that it doesn’t have a heavy debt load!

Another good sign, CIMC Enric Holdings was able to increase its EBIT by 20% in twelve months, thus facilitating the repayment of the debt. The balance sheet is clearly the area to focus on when analyzing debt. But it is future earnings, more than anything, that will determine CIMC Enric Holdings’ ability to maintain a healthy balance sheet going forward. So if you want to see what the professionals think, you might find this free analyst earnings forecast report interesting.

Finally, while the IRS may love accounting profits, lenders only accept hard cash. CIMC Enric Holdings may have net liquidity on the balance sheet, but it is always interesting to examine the extent to which the company converts its earnings before interest and taxes (EBIT) into free cash flow, as this will influence both its need and its ability to manage debt. Over the past three years, CIMC Enric Holdings has recorded free cash flow of 48% of its EBIT, which is lower than expected. This low cash conversion makes debt management more difficult.

In summary

While CIMC Enric Holdings has more liabilities than liquid assets, it also has net cash of CN Â¥ 1.91b. And it impressed us with its 20% EBIT growth over last year. So, is CIMC Enric Holdings’ debt a risk? It does not seem to us. The balance sheet is clearly the area to focus on when analyzing debt. However, not all investment risks lie on the balance sheet – far from it. Concrete example: we have spotted 2 warning signs for CIMC Enric Holdings you must be aware.

Of course, if you are the type of investor who prefers to buy stocks without going into debt, feel free to check out our exclusive list of cash net growth stocks today.

This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts using only unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell shares and does not take into account your goals or your financial situation. Our aim is to bring you long-term, targeted analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price sensitive companies or qualitative documents. Simply Wall St has no position in any of the stocks mentioned.

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