Is EE-HWA Construction (KOSDAQ:001840) A Risky Investment?

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.' 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 note that EE-HWA Construction Co., Ltd. (KOSDAQ:001840) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. If things get really bad, the lenders can take control of the business. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. 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. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for EE-HWA Construction

What Is EE-HWA Construction's Debt?

The image below, which you can click on for greater detail, shows that at March 2024 EE-HWA Construction had debt of ₩24.1b, up from ₩9.90b in one year. However, it also had ₩7.11b in cash, and so its net debt is ₩17.0b.

How Healthy Is EE-HWA Construction's Balance Sheet?

The latest balance sheet data shows that EE-HWA Construction had liabilities of ₩51.4b due within a year, and liabilities of ₩12.3b falling due after that. Offsetting this, it had ₩7.11b in cash and ₩46.4b in receivables that were due within 12 months. So its liabilities total ₩10.2b more than the combination of its cash and short-term receivables.

Given EE-HWA Construction has a market capitalization of ₩59.9b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since EE-HWA Construction will need earnings to service that debt. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

Over 12 months, EE-HWA Construction made a loss at the EBIT level, and saw its revenue drop to ₩153b, which is a fall of 11%. That's not what we would hope to see.

Caveat Emptor

While EE-HWA Construction's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩4.1b. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩18b of cash over the last year. So suffice it to say we consider the stock very risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that EE-HWA Construction is showing 3 warning signs in our investment analysis , and 1 of those is significant...

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com