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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Dongfeng Motor Group Company Limited (HKG:489) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy 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 Dongfeng Motor Group

What Is Dongfeng Motor Group's Net Debt?

As you can see below, Dongfeng Motor Group had CN¥53.1b of debt, at June 2022, which is about the same as the year before. You can click the chart for greater detail. However, it does have CN¥84.1b in cash offsetting this, leading to net cash of CN¥31.0b.

A Look At Dongfeng Motor Group's Liabilities

According to the last reported balance sheet, Dongfeng Motor Group had liabilities of CN¥125.0b due within 12 months, and liabilities of CN¥30.2b due beyond 12 months. Offsetting these obligations, it had cash of CN¥84.1b as well as receivables valued at CN¥17.8b due within 12 months. So its liabilities total CN¥53.3b more than the combination of its cash and short-term receivables.

The deficiency here weighs heavily on the CN¥34.5b company itself, as if a child were struggling under the weight of an enormous back-pack full of books, his sports gear, and a trumpet. So we definitely think shareholders need to watch this one closely. After all, Dongfeng Motor Group would likely require a major re-capitalisation if it had to pay its creditors today. Dongfeng Motor Group boasts net cash, so it's fair to say it does not have a heavy debt load, even if it does have very significant liabilities, in total. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Dongfeng Motor 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.

In the last year Dongfeng Motor Group had a loss before interest and tax, and actually shrunk its revenue by 32%, to CN¥87b. That makes us nervous, to say the least.

So How Risky Is Dongfeng Motor Group?

While Dongfeng Motor Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥8.3b. So when you consider it has net cash, along with the statutory profit, the stock probably isn't as risky as it might seem, at least in the short term. Given the lack of transparency around future revenue (and cashflow), we're nervous about this one, until it makes its first big sales. To us, it is a high risk play. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example, we've discovered 1 warning sign for Dongfeng Motor Group that you should be aware of before investing here.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.
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.