Kedge Construction (TPE:2546) Could Easily Take On More Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that Kedge Construction Co., Ltd. (TPE:2546) does use debt in its business. But the real question is whether this debt is making the company risky.

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. Of course, plenty of companies use debt to fund growth, without any negative consequences. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for Kedge Construction

What Is Kedge Construction's Debt?

The chart below, which you can click on for greater detail, shows that Kedge Construction had NT$300.0m in debt in September 2020; about the same as the year before. But it also has NT$3.18b in cash to offset that, meaning it has NT$2.88b net cash.

How Healthy Is Kedge Construction's Balance Sheet?

We can see from the most recent balance sheet that Kedge Construction had liabilities of NT$6.26b falling due within a year, and liabilities of NT$110.5m due beyond that. Offsetting this, it had NT$3.18b in cash and NT$5.10b in receivables that were due within 12 months. So it can boast NT$1.91b more liquid assets than total liabilities.

This surplus strongly suggests that Kedge Construction has a rock-solid balance sheet (and the debt is of no concern whatsoever). Having regard to this fact, we think its balance sheet is just as strong as misogynists are weak. Succinctly put, Kedge Construction boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, Kedge Construction grew its EBIT by 6.8% in the last year, making that debt load look even more manageable. There's no doubt that we learn most about debt from the balance sheet. But it is Kedge 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, while the tax-man may adore accounting profits, lenders only accept cold hard cash. Kedge 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. Happily for any shareholders, Kedge Construction 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 it is always sensible to investigate a company's debt, in this case Kedge Construction has NT$2.88b in net cash and a decent-looking balance sheet. The cherry on top was that in converted 139% of that EBIT to free cash flow, bringing in NT$1.1b. So is Kedge Construction's debt a risk? It doesn't seem so to us. 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 Kedge Construction 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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