Does Dongkuk Structures & Construction (KOSDAQ:100130) Have A Healthy Balance Sheet?

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.' 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 can see that Dongkuk Structures & Construction Company Limited (KOSDAQ:100130) does use debt in its business. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free 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 think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Dongkuk Structures & Construction

What Is Dongkuk Structures & Construction's Debt?

The chart below, which you can click on for greater detail, shows that Dongkuk Structures & Construction had ₩159.8b in debt in June 2024; about the same as the year before. On the flip side, it has ₩9.36b in cash leading to net debt of about ₩150.4b.

How Healthy Is Dongkuk Structures & Construction's Balance Sheet?

The latest balance sheet data shows that Dongkuk Structures & Construction had liabilities of ₩252.1b due within a year, and liabilities of ₩1.23b falling due after that. On the other hand, it had cash of ₩9.36b and ₩127.9b worth of receivables due within a year. So its liabilities total ₩116.1b more than the combination of its cash and short-term receivables.

This deficit is considerable relative to its market capitalization of ₩127.4b, so it does suggest shareholders should keep an eye on Dongkuk Structures & Construction's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if Dongkuk Structures & Construction can strengthen its balance sheet over time. So if you want to see what the professionals think, you might find this free report on analyst profit forecasts to be interesting.

In the last year Dongkuk Structures & Construction wasn't profitable at an EBIT level, but managed to grow its revenue by 16%, to ₩422b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months Dongkuk Structures & Construction produced an earnings before interest and tax (EBIT) loss. Indeed, it lost a very considerable ₩15b at the EBIT level. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩48b of cash over the last year. So in short it's a really risky stock. 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. We've identified 2 warning signs with Dongkuk Structures & Construction (at least 1 which is significant) , and understanding them should be part of your investment process.

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.