We Think Geumhwa Plant Service & Construction (KOSDAQ:036190) 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.' 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. As with many other companies Geumhwa Plant Service & Construction Co., Ltd. (KOSDAQ:036190) makes use of debt. But is this debt a concern to shareholders?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for Geumhwa Plant Service & Construction

What Is Geumhwa Plant Service & Construction's Net Debt?

As you can see below, Geumhwa Plant Service & Construction had ₩3.76b of debt at September 2020, down from ₩4.74b a year prior. However, it does have ₩148.1b in cash offsetting this, leading to net cash of ₩144.4b.

How Strong Is Geumhwa Plant Service & Construction's Balance Sheet?

We can see from the most recent balance sheet that Geumhwa Plant Service & Construction had liabilities of ₩33.0b falling due within a year, and liabilities of ₩8.96b due beyond that. On the other hand, it had cash of ₩148.1b and ₩10.6b worth of receivables due within a year. So it actually has ₩116.8b more liquid assets than total liabilities.

This luscious liquidity implies that Geumhwa Plant Service & Construction's balance sheet is sturdy like a giant sequoia tree. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Geumhwa Plant Service & Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Geumhwa Plant Service & Construction grew its EBIT by 42% over the last twelve months, and that growth will make it easier to handle its debt. When analysing debt levels, the balance sheet is the obvious place to start. But it is Geumhwa Plant Service & Construction's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Geumhwa Plant Service & Construction may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the most recent three years, Geumhwa Plant Service & Construction recorded free cash flow worth 56% of its EBIT, which is around normal, given free cash flow excludes interest and tax. This cold hard cash means it can reduce its debt when it wants to.

Summing up

While it is always sensible to investigate a company's debt, in this case Geumhwa Plant Service & Construction has ₩144.4b in net cash and a decent-looking balance sheet. And it impressed us with its EBIT growth of 42% over the last year. The bottom line is that we do not find Geumhwa Plant Service & Construction's debt levels at all concerning. Given Geumhwa Plant Service & Construction has a strong balance sheet is profitable and pays a dividend, it would be good to know how fast its dividends are growing, if at all. You can find out instantly by clicking this link.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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