Is Dongkuk Structures & Construction (KOSDAQ:100130) Using Debt In A Risky Way?

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 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 Dongkuk Structures & Construction Company Limited (KOSDAQ:100130) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. 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. 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 Dongkuk Structures & Construction

What Is Dongkuk Structures & Construction's Debt?

The image below, which you can click on for greater detail, shows that Dongkuk Structures & Construction had debt of ₩146.2b at the end of March 2024, a reduction from ₩181.8b over a year. On the flip side, it has ₩26.4b in cash leading to net debt of about ₩119.9b.

A Look At Dongkuk Structures & Construction's Liabilities

We can see from the most recent balance sheet that Dongkuk Structures & Construction had liabilities of ₩240.2b falling due within a year, and liabilities of ₩1.37b due beyond that. Offsetting this, it had ₩26.4b in cash and ₩77.4b in receivables that were due within 12 months. So its liabilities total ₩137.9b more than the combination of its cash and short-term receivables.

When you consider that this deficiency exceeds the company's ₩133.5b market capitalization, you might well be inclined to review the balance sheet intently. Hypothetically, extremely heavy dilution would be required if the company were forced to pay down its liabilities by raising capital at the current share price. There's no doubt that we learn most about debt from the balance sheet. 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.

In the last year Dongkuk Structures & Construction had a loss before interest and tax, and actually shrunk its revenue by 17%, to ₩379b. We would much prefer see growth.

Caveat Emptor

While Dongkuk Structures & Construction's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. Its EBIT loss was a whopping ₩40b. Considering that alongside the liabilities mentioned above make us nervous about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩32b. In the meantime, we consider the stock to be risky. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example Dongkuk Structures & Construction has 3 warning signs (and 1 which can't be ignored) we think you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com