Namkwang Engineering & Construction (KRX:001260) Has A Rock Solid Balance Sheet

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that 'Volatility is far from synonymous with risk.' 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. We can see that Namkwang Engineering & Construction Co., Ltd. (KRX:001260) does use debt in its business. But the more important question is: how much risk is that debt creating?

Why Does Debt Bring Risk?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. 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. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Namkwang Engineering & Construction

How Much Debt Does Namkwang Engineering & Construction Carry?

The chart below, which you can click on for greater detail, shows that Namkwang Engineering & Construction had ₩36.2b in debt in June 2024; about the same as the year before. But on the other hand it also has ₩78.8b in cash, leading to a ₩42.6b net cash position.

How Healthy Is Namkwang Engineering & Construction's Balance Sheet?

We can see from the most recent balance sheet that Namkwang Engineering & Construction had liabilities of ₩282.2b falling due within a year, and liabilities of ₩12.4b due beyond that. On the other hand, it had cash of ₩78.8b and ₩204.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩11.5b.

Given Namkwang Engineering & Construction has a market capitalization of ₩61.4b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, Namkwang Engineering & Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, Namkwang Engineering & Construction grew its EBIT by 1,050% last year, which is an impressive improvement. That boost will make it even easier to pay down debt going forward. There's no doubt that we learn most about debt from the balance sheet. But it is Namkwang Engineering & Construction'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. Namkwang Engineering & 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. During the last three years, Namkwang Engineering & Construction produced sturdy free cash flow equating to 78% of its EBIT, about what we'd expect. This free cash flow puts the company in a good position to pay down debt, when appropriate.

Summing Up

Although Namkwang Engineering & Construction's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩42.6b. And we liked the look of last year's 1,050% year-on-year EBIT growth. So we don't think Namkwang Engineering & Construction's use of debt is risky. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - Namkwang Engineering & Construction has 1 warning sign we think you should be aware of.

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. 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.