David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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. We note that CIMC Vehicles (Group) Co., Ltd. (HKG:1839) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for CIMC Vehicles (Group)

How Much Debt Does CIMC Vehicles (Group) Carry?

You can click the graphic below for the historical numbers, but it shows that as of March 2022 CIMC Vehicles (Group) had CN¥1.47b of debt, an increase on none, over one year. But on the other hand it also has CN¥4.42b in cash, leading to a CN¥2.96b net cash position.

How Strong Is CIMC Vehicles (Group)'s Balance Sheet?

Zooming in on the latest balance sheet data, we can see that CIMC Vehicles (Group) had liabilities of CN¥9.30b due within 12 months and liabilities of CN¥765.2m due beyond that. Offsetting this, it had CN¥4.42b in cash and CN¥4.32b in receivables that were due within 12 months. So it has liabilities totalling CN¥1.33b more than its cash and near-term receivables, combined.

Since publicly traded CIMC Vehicles (Group) shares are worth a total of CN¥15.7b, 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 Vehicles (Group) boasts net cash, so it's fair to say it does not have a heavy debt load!

In fact CIMC Vehicles (Group)'s saving grace is its low debt levels, because its EBIT has tanked 49% in the last twelve months. When it comes to paying off debt, falling earnings are no more useful than sugary sodas are for your health. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if 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 report on analyst profit forecasts to be interesting.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. While CIMC Vehicles (Group) 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. Looking at the most recent three years, CIMC Vehicles (Group) recorded free cash flow of 27% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about CIMC Vehicles (Group)'s liabilities, but we can be reassured by the fact it has has net cash of CN¥2.96b. So we are not troubled with CIMC Vehicles (Group)'s debt use. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 2 warning signs for CIMC Vehicles (Group) (1 shouldn't be ignored!) that you should be aware of before investing here.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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.