Here's Why Tuksu Engineering & ConstructionLtd (KOSDAQ:026150) Can Manage Its Debt Responsibly

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 might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. We note that Tuksu Engineering & Construction,Ltd. (KOSDAQ:026150) does have debt on its balance sheet. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Tuksu Engineering & ConstructionLtd

What Is Tuksu Engineering & ConstructionLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Tuksu Engineering & ConstructionLtd had debt of ₩22.2b at the end of September 2020, a reduction from ₩24.2b over a year. However, its balance sheet shows it holds ₩22.6b in cash, so it actually has ₩330.1m net cash.

How Healthy Is Tuksu Engineering & ConstructionLtd's Balance Sheet?

According to the last reported balance sheet, Tuksu Engineering & ConstructionLtd had liabilities of ₩55.1b due within 12 months, and liabilities of ₩24.6b due beyond 12 months. Offsetting this, it had ₩22.6b in cash and ₩65.0b in receivables that were due within 12 months. So it actually has ₩7.79b more liquid assets than total liabilities.

This short term liquidity is a sign that Tuksu Engineering & ConstructionLtd could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Tuksu Engineering & ConstructionLtd boasts net cash, so it's fair to say it does not have a heavy debt load!

If Tuksu Engineering & ConstructionLtd can keep growing EBIT at last year's rate of 17% over the last year, then it will find its debt load easier to manage. There's no doubt that we learn most about debt from the balance sheet. But it is Tuksu Engineering & ConstructionLtd's earnings that will influence how the balance sheet holds up in the future. 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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. While Tuksu Engineering & ConstructionLtd 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. Over the last three years, Tuksu Engineering & ConstructionLtd saw substantial negative free cash flow, in total. While investors are no doubt expecting a reversal of that situation in due course, it clearly does mean its use of debt is more risky.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Tuksu Engineering & ConstructionLtd has net cash of ₩330.1m, as well as more liquid assets than liabilities. And it impressed us with its EBIT growth of 17% over the last year. So we are not troubled with Tuksu Engineering & ConstructionLtd's debt use. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 2 warning signs for Tuksu Engineering & ConstructionLtd you should be aware of.

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.

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