Here's Why Chainqui Construction Development (TWSE:2509) Can Afford Some 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. Importantly, Chainqui Construction Development Co., Ltd. (TWSE:2509) does carry debt. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt is a tool to help businesses grow, but if a business is incapable of paying off its lenders, then it exists at their mercy. If things get really bad, the lenders can take control of the business. 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, 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 Chainqui Construction Development

How Much Debt Does Chainqui Construction Development Carry?

As you can see below, at the end of December 2023, Chainqui Construction Development had NT$3.71b of debt, up from NT$2.99b a year ago. Click the image for more detail. On the flip side, it has NT$1.42b in cash leading to net debt of about NT$2.30b.

A Look At Chainqui Construction Development's Liabilities

The latest balance sheet data shows that Chainqui Construction Development had liabilities of NT$4.11b due within a year, and liabilities of NT$1.16b falling due after that. Offsetting this, it had NT$1.42b in cash and NT$23.0m in receivables that were due within 12 months. So it has liabilities totalling NT$3.83b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of NT$5.23b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Chainqui Construction Development'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.

In the last year Chainqui Construction Development wasn't profitable at an EBIT level, but managed to grow its revenue by 10%, to NT$223m. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Importantly, Chainqui Construction Development had an earnings before interest and tax (EBIT) loss over the last year. To be specific the EBIT loss came in at NT$86m. Considering that alongside the liabilities mentioned above does not give us much confidence that company should be using so much debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through NT$1.2b of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for Chainqui Construction Development that 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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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.