Dongkuk Structures & Construction (KOSDAQ:100130) Could Easily Take On More Debt

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.' 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. As with many other companies Dongkuk Structures & Construction Company Limited (KOSDAQ:100130) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Dongkuk Structures & Construction

What Is Dongkuk Structures & Construction's Net Debt?

As you can see below, Dongkuk Structures & Construction had ₩43.5b of debt at September 2020, down from ₩59.4b a year prior. But it also has ₩125.1b in cash to offset that, meaning it has ₩81.5b net cash.

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

The latest balance sheet data shows that Dongkuk Structures & Construction had liabilities of ₩101.8b due within a year, and liabilities of ₩11.6b falling due after that. On the other hand, it had cash of ₩125.1b and ₩41.2b worth of receivables due within a year. So it can boast ₩52.8b more liquid assets than total liabilities.

This surplus suggests that Dongkuk Structures & Construction is using debt in a way that is appears to be both safe and conservative. Because it has plenty of assets, it is unlikely to have trouble with its lenders. Succinctly put, Dongkuk Structures & Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

On top of that, Dongkuk Structures & Construction grew its EBIT by 40% over the last twelve months, and that growth will make it easier to handle its debt. The balance sheet is clearly the area to focus on when you are analysing debt. But it is future earnings, more than anything, that will determine Dongkuk Structures & Construction's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Dongkuk Structures & 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 last two years, Dongkuk Structures & Construction actually produced more free cash flow than EBIT. That sort of strong cash conversion gets us as excited as the crowd when the beat drops at a Daft Punk concert.

Summing up

While it is always sensible to investigate a company's debt, in this case Dongkuk Structures & Construction has ₩81.5b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of ₩88b, being 314% of its EBIT. When it comes to Dongkuk Structures & Construction's debt, we sufficiently relaxed that our mind turns to the jacuzzi. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Dongkuk Structures & Construction you should know about.

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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This article by Simply Wall St is general in nature. 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.
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