Dongfeng Motor Group (HKG:489) Has Debt But No Earnings; Should You Worry?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Dongfeng Motor Group Company Limited (HKG:489) does carry debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for Dongfeng Motor Group

How Much Debt Does Dongfeng Motor Group Carry?

The image below, which you can click on for greater detail, shows that Dongfeng Motor Group had debt of CN¥50.8b at the end of June 2023, a reduction from CN¥53.1b over a year. However, its balance sheet shows it holds CN¥92.4b in cash, so it actually has CN¥41.5b net cash.

How Healthy Is Dongfeng Motor Group's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Dongfeng Motor Group had liabilities of CN¥112.8b due within 12 months and liabilities of CN¥38.7b due beyond that. Offsetting these obligations, it had cash of CN¥92.4b as well as receivables valued at CN¥21.1b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by CN¥38.1b.

This deficit casts a shadow over the CN¥22.7b company, like a colossus towering over mere mortals. So we'd watch its balance sheet closely, without a doubt. At the end of the day, Dongfeng Motor Group would probably need a major re-capitalization if its creditors were to demand repayment. 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. 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 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.

Over 12 months, Dongfeng Motor Group reported revenue of CN¥94b, which is a gain of 7.6%, 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?

While Dongfeng Motor Group lost money on an earnings before interest and tax (EBIT) level, it actually booked a paper profit of CN¥6.0b. So taking that on face value, and considering the cash, we don't think its very risky in the near term. We're not impressed by its revenue growth, so until we see some positive sustainable EBIT, we consider the stock to be high risk. 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. We've identified 3 warning signs with Dongfeng Motor Group , and understanding them should be part of your investment process.

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.