Does Da-Cin ConstructionLtd (TPE:2535) Have A Healthy Balance Sheet?

Warren Buffett famously said, '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 note that Da-Cin Construction Co.,Ltd. (TPE:2535) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

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

Check out our latest analysis for Da-Cin ConstructionLtd

How Much Debt Does Da-Cin ConstructionLtd Carry?

As you can see below, Da-Cin ConstructionLtd had NT$2.66b of debt at September 2020, down from NT$2.82b a year prior. However, its balance sheet shows it holds NT$5.49b in cash, so it actually has NT$2.83b net cash.

How Strong Is Da-Cin ConstructionLtd's Balance Sheet?

According to the last reported balance sheet, Da-Cin ConstructionLtd had liabilities of NT$9.26b due within 12 months, and liabilities of NT$1.67b due beyond 12 months. On the other hand, it had cash of NT$5.49b and NT$3.86b worth of receivables due within a year. So it has liabilities totalling NT$1.58b more than its cash and near-term receivables, combined.

Of course, Da-Cin ConstructionLtd has a market capitalization of NT$8.35b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. While it does have liabilities worth noting, Da-Cin ConstructionLtd also has more cash than debt, so we're pretty confident it can manage its debt safely.

On top of that, Da-Cin ConstructionLtd grew its EBIT by 53% 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 ultimately the future profitability of the business will decide if Da-Cin ConstructionLtd can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. Da-Cin ConstructionLtd 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. Happily for any shareholders, Da-Cin ConstructionLtd actually produced more free cash flow than EBIT over the last three years. 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 Da-Cin ConstructionLtd does have more liabilities than liquid assets, it also has net cash of NT$2.83b. The cherry on top was that in converted 120% of that EBIT to free cash flow, bringing in NT$1.8b. So we don't think Da-Cin ConstructionLtd's use of debt is 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for Da-Cin ConstructionLtd you should know about.

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. 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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