Is Kedge Construction (TPE:2546) A Risky Investment?

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. Importantly, Kedge Construction Co., Ltd. (TPE:2546) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

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. 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 Kedge Construction

How Much Debt Does Kedge Construction Carry?

You can click the graphic below for the historical numbers, but it shows that Kedge Construction had NT$139.7m of debt in December 2020, down from NT$150.0m, one year before. However, it does have NT$4.35b in cash offsetting this, leading to net cash of NT$4.21b.

How Healthy Is Kedge Construction's Balance Sheet?

The latest balance sheet data shows that Kedge Construction had liabilities of NT$6.20b due within a year, and liabilities of NT$162.3m falling due after that. Offsetting this, it had NT$4.35b in cash and NT$4.27b in receivables that were due within 12 months. So it actually has NT$2.26b more liquid assets than total liabilities.

This surplus liquidity suggests that Kedge Construction's balance sheet could take a hit just as well as Homer Simpson's head can take a punch. With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Kedge Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

In addition to that, we're happy to report that Kedge Construction has boosted its EBIT by 64%, thus reducing the spectre of future debt repayments. When analysing debt levels, the balance sheet is the obvious place to start. But it is Kedge Construction's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

Finally, a business needs free cash flow to pay off debt; accounting profits just don't cut it. While Kedge Construction has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Happily for any shareholders, Kedge Construction actually produced more free cash flow than EBIT over the last three years. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing up

While it is always sensible to investigate a company's debt, in this case Kedge Construction has NT$4.21b in net cash and a decent-looking balance sheet. And it impressed us with free cash flow of NT$1.9b, being 180% of its EBIT. At the end of the day we're not concerned about Kedge Construction's debt. The balance sheet is clearly the area to focus on when you are analysing debt. However, not all investment risk resides within the balance sheet - far from it. For example, we've discovered 1 warning sign for Kedge Construction that you should be aware of before investing here.

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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