Daelim Construction (KRX:001880) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Daelim Construction Co. (KRX:001880) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Daelim Construction

What Is Daelim Construction's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Daelim Construction had debt of ₩169.9b, up from ₩59.9b in one year. But on the other hand it also has ₩577.8b in cash, leading to a ₩407.9b net cash position.

How Strong Is Daelim Construction's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Daelim Construction had liabilities of ₩522.2b due within 12 months and liabilities of ₩240.0b due beyond that. Offsetting this, it had ₩577.8b in cash and ₩472.5b in receivables that were due within 12 months. So it can boast ₩288.1b more liquid assets than total liabilities.

This excess liquidity is a great indication that Daelim Construction's balance sheet is just as strong as racists are weak. On this basis we think its balance sheet is strong like a sleek panther or even a proud lion. Simply put, the fact that Daelim Construction has more cash than debt is arguably a good indication that it can manage its debt safely.

On top of that, Daelim 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 you can't view debt in total isolation; since Daelim Construction will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Daelim 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, Daelim Construction produced sturdy free cash flow equating to 77% of its EBIT, about what we'd expect. 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 Daelim Construction has ₩407.9b in net cash and a decent-looking balance sheet. And we liked the look of last year's 40% year-on-year EBIT growth. At the end of the day we're not concerned about Daelim Construction's debt. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Case in point: We've spotted 1 warning sign for Daelim Construction you should be aware of.

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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