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.' 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 the more important question is: how much risk is that debt creating?
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. 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. The first step when considering a company's debt levels is to consider its cash and debt together.
See our latest analysis for Dongfeng Motor Group
What Is Dongfeng Motor Group's Debt?
As you can see below, at the end of June 2024, Dongfeng Motor Group had CN¥63.2b of debt, up from CN¥50.8b a year ago. Click the image for more detail. But on the other hand it also has CN¥96.3b in cash, leading to a CN¥33.1b net cash position.
How Strong 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¥132.0b due within 12 months and liabilities of CN¥32.8b due beyond that. Offsetting these obligations, it had cash of CN¥96.3b as well as receivables valued at CN¥22.0b due within 12 months. So it has liabilities totalling CN¥46.6b more than its cash and near-term receivables, combined.
Given this deficit is actually higher than the company's market capitalization of CN¥31.7b, 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. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. 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 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 wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥105b. 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 generated positive free cash flow CN¥5.5b. So although it is loss-making, it doesn't seem to have too much near-term balance sheet risk, keeping in mind the net cash. 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 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.
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.