Is Tuksu Engineering & ConstructionLtd (KOSDAQ:026150) A Risky Investment?

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. As with many other companies Tuksu Engineering & Construction,Ltd. (KOSDAQ:026150) makes use of debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for Tuksu Engineering & ConstructionLtd

How Much Debt Does Tuksu Engineering & ConstructionLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2024 Tuksu Engineering & ConstructionLtd had ₩48.7b of debt, an increase on ₩16.9b, over one year. However, because it has a cash reserve of ₩27.1b, its net debt is less, at about ₩21.6b.

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

According to the last reported balance sheet, Tuksu Engineering & ConstructionLtd had liabilities of ₩96.0b due within 12 months, and liabilities of ₩11.2b due beyond 12 months. Offsetting these obligations, it had cash of ₩27.1b as well as receivables valued at ₩66.2b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩13.9b.

Of course, Tuksu Engineering & ConstructionLtd has a market capitalization of ₩93.0b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time.

We measure a company's debt load relative to its earnings power by looking at its net debt divided by its earnings before interest, tax, depreciation, and amortization (EBITDA) and by calculating how easily its earnings before interest and tax (EBIT) cover its interest expense (interest cover). The advantage of this approach is that we take into account both the absolute quantum of debt (with net debt to EBITDA) and the actual interest expenses associated with that debt (with its interest cover ratio).

While Tuksu Engineering & ConstructionLtd's low debt to EBITDA ratio of 1.3 suggests only modest use of debt, the fact that EBIT only covered the interest expense by 3.0 times last year does give us pause. But the interest payments are certainly sufficient to have us thinking about how affordable its debt is. Notably, Tuksu Engineering & ConstructionLtd's EBIT launched higher than Elon Musk, gaining a whopping 201% on last year. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. So we always check how much of that EBIT is translated into free cash flow. Over the last two years, Tuksu Engineering & ConstructionLtd saw substantial negative free cash flow, in total. While that may be a result of expenditure for growth, it does make the debt far more risky.

Our View

Based on what we've seen Tuksu Engineering & ConstructionLtd is not finding it easy, given its conversion of EBIT to free cash flow, but the other factors we considered give us cause to be optimistic. There's no doubt that its ability to to grow its EBIT is pretty flash. When we consider all the factors mentioned above, we do feel a bit cautious about Tuksu Engineering & ConstructionLtd's use of debt. While debt does have its upside in higher potential returns, we think shareholders should definitely consider how debt levels might make the stock more 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. For instance, we've identified 3 warning signs for Tuksu Engineering & ConstructionLtd (2 are a bit unpleasant) you should be aware of.

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.