Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. Importantly, CIMC Vehicle (Group) Co., Ltd. (HKG:1839) does carry debt. But the real question is whether this debt is making the company risky.
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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 step when considering a company's debt levels is to consider its cash and debt together.
Check out our latest analysis for CIMC Vehicle (Group)
What Is CIMC Vehicle (Group)'s Net Debt?
You can click the graphic below for the historical numbers, but it shows that CIMC Vehicle (Group) had CN¥1.79b of debt in June 2019, down from CN¥2.45b, one year before. But it also has CN¥2.17b in cash to offset that, meaning it has CN¥378.9m net cash.
How Healthy Is CIMC Vehicle (Group)'s Balance Sheet?
According to the last reported balance sheet, CIMC Vehicle (Group) had liabilities of CN¥8.24b due within 12 months, and liabilities of CN¥353.3m due beyond 12 months. Offsetting these obligations, it had cash of CN¥2.17b as well as receivables valued at CN¥3.99b due within 12 months. So its liabilities total CN¥2.43b more than the combination of its cash and short-term receivables.
While this might seem like a lot, it is not so bad since CIMC Vehicle (Group) has a market capitalization of CN¥8.80b, and so it could probably strengthen its balance sheet by raising capital if it needed to. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, CIMC Vehicle (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!
Also good is that CIMC Vehicle (Group) grew its EBIT at 17% over the last year, further increasing its ability to manage debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine CIMC Vehicle (Group)'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.