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. We can see that Dongfeng Motor Group Company Limited (HKG:489) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

Check out our latest analysis for Dongfeng Motor Group

How Much Debt Does Dongfeng Motor Group Carry?

The chart below, which you can click on for greater detail, shows that Dongfeng Motor Group had CN¥53.1b in debt in June 2022; about the same as the year before. However, its balance sheet shows it holds CN¥84.1b in cash, so it actually has CN¥31.0b net cash.

How Strong Is Dongfeng Motor Group's Balance Sheet?

We can see from the most recent balance sheet that Dongfeng Motor Group had liabilities of CN¥125.0b falling due within a year, and liabilities of CN¥30.2b due beyond that. Offsetting these obligations, it had cash of CN¥84.1b as well as receivables valued at CN¥16.5b due within 12 months. So its liabilities total CN¥54.6b more than the combination of its cash and short-term receivables.

Given this deficit is actually higher than the company's market capitalization of CN¥37.8b, 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. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine Dongfeng Motor Group's ability to maintain a healthy balance sheet going forward. 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 made a loss at the EBIT level, and saw its revenue drop to CN¥87b, which is a fall of 31%. To be frank that doesn't bode well.

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. 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. However, not all investment risk resides within the balance sheet - far from it. Case in point: We've spotted 1 warning sign for Dongfeng Motor Group you should be aware of.

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.