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.' 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 should shareholders be worried about its use of debt?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CIMC Enric Holdings

What Is CIMC Enric Holdings's Debt?

As you can see below, at the end of June 2022, CIMC Enric Holdings had CN¥2.08b of debt, up from CN¥1.28b a year ago. Click the image for more detail. However, its balance sheet shows it holds CN¥5.61b in cash, so it actually has CN¥3.52b net cash.

How Strong Is CIMC Enric Holdings' Balance Sheet?

According to the last reported balance sheet, CIMC Enric Holdings had liabilities of CN¥10.2b due within 12 months, and liabilities of CN¥2.04b due beyond 12 months. Offsetting these obligations, it had cash of CN¥5.61b as well as receivables valued at CN¥4.63b due within 12 months. So its liabilities total CN¥1.96b more than the combination of its cash and short-term receivables.

Since publicly traded CIMC Enric Holdings shares are worth a total of CN¥16.7b, 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. Despite its noteworthy liabilities, CIMC Enric Holdings boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, CIMC Enric Holdings grew its EBIT by 35% over the last twelve months, and that growth will make it easier to handle its debt. There's no doubt that we learn most about debt from the balance sheet. 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 want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While CIMC Enric Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, CIMC Enric Holdings recorded free cash flow worth a fulsome 82% of its EBIT, which is stronger than we'd usually expect. That positions it well to pay down debt if desirable to do so.

Summing Up

While CIMC Enric Holdings does have more liabilities than liquid assets, it also has net cash of CN¥3.52b. The cherry on top was that in converted 82% of that EBIT to free cash flow, bringing in CN¥1.7b. So we don't think CIMC Enric Holdings's use of debt is risky. Another factor that would give us confidence in CIMC Enric Holdings would be if insiders have been buying shares: if you're conscious of that signal too, you can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.