Is Taeyoung Engineering & ConstructionLtd (KRX:009410) Using Too Much Debt?

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 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. As with many other companies Taeyoung Engineering & Construction Co.,Ltd. (KRX:009410) makes use of debt. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. 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. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for Taeyoung Engineering & ConstructionLtd

What Is Taeyoung Engineering & ConstructionLtd's Net Debt?

The image below, which you can click on for greater detail, shows that Taeyoung Engineering & ConstructionLtd had debt of ₩1.82t at the end of September 2024, a reduction from ₩2.43t over a year. However, it also had ₩363.6b in cash, and so its net debt is ₩1.46t.

A Look At Taeyoung Engineering & ConstructionLtd's Liabilities

According to the last reported balance sheet, Taeyoung Engineering & ConstructionLtd had liabilities of ₩2.39t due within 12 months, and liabilities of ₩1.64t due beyond 12 months. Offsetting this, it had ₩363.6b in cash and ₩1.06t in receivables that were due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩2.61t.

This deficit casts a shadow over the ₩724.3b company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. After all, Taeyoung Engineering & ConstructionLtd would likely require a major re-capitalisation if it had to pay its creditors today. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since Taeyoung Engineering & ConstructionLtd will need earnings to service that debt. 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.

Over 12 months, Taeyoung Engineering & ConstructionLtd made a loss at the EBIT level, and saw its revenue drop to ₩3.0t, which is a fall of 7.1%. That's not what we would hope to see.

Caveat Emptor

Over the last twelve months Taeyoung Engineering & ConstructionLtd produced an earnings before interest and tax (EBIT) loss. Its EBIT loss was a whopping ₩509b. If you consider the significant liabilities mentioned above, we are extremely wary of this investment. Of course, it may be able to improve its situation with a bit of luck and good execution. But we think that is unlikely, given it is low on liquid assets, and burned through ₩339b in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Taeyoung Engineering & ConstructionLtd that you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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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.