Is Dongfeng Motor Group (HKG:489) Using Debt In A Risky Way?

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We can see that Dongfeng Motor Group Company Limited (HKG:489) does use debt in its business. 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. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Dongfeng Motor Group

How Much Debt Does Dongfeng Motor Group Carry?

You can click the graphic below for the historical numbers, but it shows that Dongfeng Motor Group had CN¥50.8b of debt in June 2023, down from CN¥53.1b, one year before. However, its balance sheet shows it holds CN¥92.4b in cash, so it actually has CN¥41.5b net cash.

A Look At Dongfeng Motor Group's Liabilities

We can see from the most recent balance sheet that Dongfeng Motor Group had liabilities of CN¥112.8b falling due within a year, and liabilities of CN¥38.7b due beyond that. Offsetting this, it had CN¥92.4b in cash and CN¥22.0b in receivables that were due within 12 months. So it has liabilities totalling CN¥37.1b more than its cash and near-term receivables, combined.

Given this deficit is actually higher than the company's market capitalization of CN¥30.5b, we think shareholders really should watch Dongfeng Motor Group's debt levels, like a parent watching their child ride a bike for the first time. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. Given that Dongfeng Motor Group has more cash than debt, we're pretty confident it can handle its debt, despite the fact that it has a lot of liabilities in total. 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.

In the last year Dongfeng Motor Group wasn't profitable at an EBIT level, but managed to grow its revenue by 7.3%, to CN¥94b. That rate of growth is a bit slow for our taste, but it takes all types to make a world.

So How Risky Is Dongfeng Motor Group?

Although Dongfeng Motor Group had an earnings before interest and tax (EBIT) loss over the last twelve months, it made a statutory 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. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. To that end, you should learn about the 4 warning signs we've spotted with Dongfeng Motor Group (including 1 which makes us a bit uncomfortable) .

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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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.