We Think EE-HWA Construction (KOSDAQ:001840) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a 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 EE-HWA Construction Co., Ltd. (KOSDAQ:001840) does have debt on its balance sheet. But is this debt a concern to shareholders?

Why Does Debt Bring Risk?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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 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 EE-HWA Construction

What Is EE-HWA Construction's Debt?

You can click the graphic below for the historical numbers, but it shows that EE-HWA Construction had ₩2.00b of debt in September 2020, down from ₩2.43b, one year before. However, its balance sheet shows it holds ₩22.8b in cash, so it actually has ₩20.8b net cash.

A Look At EE-HWA Construction's Liabilities

The latest balance sheet data shows that EE-HWA Construction had liabilities of ₩32.5b due within a year, and liabilities of ₩5.81b falling due after that. Offsetting these obligations, it had cash of ₩22.8b as well as receivables valued at ₩28.4b due within 12 months. So it actually has ₩12.9b more liquid assets than total liabilities.

This short term liquidity is a sign that EE-HWA Construction could probably pay off its debt with ease, as its balance sheet is far from stretched. Simply put, the fact that EE-HWA Construction has more cash than debt is arguably a good indication that it can manage its debt safely.

Although EE-HWA Construction made a loss at the EBIT level, last year, it was also good to see that it generated ₩1.6b in EBIT over the last twelve months. The balance sheet is clearly the area to focus on when you are analysing debt. 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.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While EE-HWA Construction has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, EE-HWA Construction actually produced more free cash flow than EBIT over the last year. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case EE-HWA Construction has ₩20.8b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 450% of that EBIT to free cash flow, bringing in ₩7.4b. So we don't think EE-HWA Construction's use of debt is 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. To that end, you should learn about the 2 warning signs we've spotted with EE-HWA Construction (including 1 which shouldn't be ignored) .

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

If you decide to trade EE-HWA Construction, use the lowest-cost* platform that is rated #1 Overall by Barron’s, Interactive Brokers. Trade stocks, options, futures, forex, bonds and funds on 135 markets, all from a single integrated account. Promoted

This article by Simply Wall St is general in nature. 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.
^*Interactive Brokers Rated Lowest Cost Broker by StockBrokers.com Annual Online Review 2020

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