Is Tuksu Engineering & ConstructionLtd (KOSDAQ:026150) Using Too Much Debt?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says '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 can see that Tuksu Engineering & Construction,Ltd. (KOSDAQ:026150) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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 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. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View 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 Tuksu Engineering & ConstructionLtd had ₩22.2b of debt in September 2020, down from ₩24.2b, one year before. However, it does have ₩22.6b in cash offsetting this, leading to net cash of ₩330.1m.

A Look At Tuksu Engineering & ConstructionLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that Tuksu Engineering & ConstructionLtd had liabilities of ₩55.1b due within 12 months and liabilities of ₩24.6b due beyond that. Offsetting this, it had ₩22.6b in cash and ₩65.0b in receivables that were due within 12 months. So it can boast ₩7.79b more liquid assets than total liabilities.

This surplus suggests that Tuksu Engineering & ConstructionLtd has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Simply put, the fact that Tuksu Engineering & ConstructionLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

One way Tuksu Engineering & ConstructionLtd could vanquish its debt would be if it stops borrowing more but continues to grow EBIT at around 17%, as it did over the last year. 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 that may be a result of expenditure for growth, it does make the debt far 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 we liked the look of last year's 17% year-on-year EBIT growth. So we don't have any problem with Tuksu Engineering & ConstructionLtd's use of debt. 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. For instance, we've identified 1 warning sign for Tuksu Engineering & ConstructionLtd that 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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