These 4 Measures Indicate That New Asia Construction & Development (TWSE:2516) Is Using Debt Reasonably Well

Legendary fund manager Li Lu (who Charlie Munger backed) once said, 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' 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 New Asia Construction & Development Corp. (TWSE:2516) does have debt on its balance sheet. But the real question is whether this debt is making the company risky.

When Is Debt A Problem?

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 usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for New Asia Construction & Development

How Much Debt Does New Asia Construction & Development Carry?

The image below, which you can click on for greater detail, shows that at September 2024 New Asia Construction & Development had debt of NT$1.11b, up from NT$972.5m in one year. But on the other hand it also has NT$1.33b in cash, leading to a NT$217.8m net cash position.

A Look At New Asia Construction & Development's Liabilities

The latest balance sheet data shows that New Asia Construction & Development had liabilities of NT$4.92b due within a year, and liabilities of NT$118.7m falling due after that. On the other hand, it had cash of NT$1.33b and NT$2.44b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.28b.

New Asia Construction & Development has a market capitalization of NT$4.40b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, New Asia Construction & Development boasts net cash, so it's fair to say it does not have a heavy debt load!

It was also good to see that despite losing money on the EBIT line last year, New Asia Construction & Development turned things around in the last 12 months, delivering and EBIT of NT$97m. There's no doubt that we learn most about debt from the balance sheet. But it is New Asia Construction & Development'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. While New Asia Construction & Development 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. In the last year, New Asia Construction & Development created free cash flow amounting to 2.6% of its EBIT, an uninspiring performance. That limp level of cash conversion undermines its ability to manage and pay down debt.

Summing Up

While New Asia Construction & Development does have more liabilities than liquid assets, it also has net cash of NT$217.8m. So we are not troubled with New Asia Construction & Development's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 1 warning sign for New Asia Construction & Development you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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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.