The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 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. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Dongfeng Motor Group's Debt?

As you can see below, at the end of December 2023, Dongfeng Motor Group had CN¥59.3b of debt, up from CN¥52.4b a year ago. Click the image for more detail. But it also has CN¥110.5b in cash to offset that, meaning it has CN¥51.3b net cash.

A Look At Dongfeng Motor Group's Liabilities

According to the last reported balance sheet, Dongfeng Motor Group had liabilities of CN¥133.0b due within 12 months, and liabilities of CN¥38.1b due beyond 12 months. Offsetting this, it had CN¥110.5b in cash and CN¥48.0b in receivables that were due within 12 months. So its liabilities total CN¥12.6b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of CN¥18.2b, so it does suggest shareholders should keep an eye on Dongfeng Motor Group's use of debt. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. Despite its noteworthy liabilities, Dongfeng Motor Group boasts net cash, so it's fair to say it does not have a heavy debt load! When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dongfeng Motor Group can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Dongfeng Motor Group reported revenue of CN¥99b, which is a gain of 7.2%, although it did not report any earnings before interest and tax. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is Dongfeng Motor Group?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that Dongfeng Motor Group had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through CN¥4.1b of cash and made a loss of CN¥4.0b. Given it only has net cash of CN¥51.3b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. When we look at a riskier company, we like to check how their profits (or losses) are trending over time. Today, we're providing readers this interactive graph showing how Dongfeng Motor Group's profit, revenue, and operating cashflow have changed over the last few years.

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.