Is Delpha ConstructionLtd (TPE:2530) Using Too Much Debt?

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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. As with many other companies Delpha Construction Co.,Ltd. (TPE:2530) makes use of debt. But the more important question is: how much risk is that debt creating?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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. 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 Delpha ConstructionLtd

How Much Debt Does Delpha ConstructionLtd Carry?

You can click the graphic below for the historical numbers, but it shows that as of September 2020 Delpha ConstructionLtd had NT$1.69b of debt, an increase on NT$1.51b, over one year. However, it also had NT$212.3m in cash, and so its net debt is NT$1.47b.

A Look At Delpha ConstructionLtd's Liabilities

According to the last reported balance sheet, Delpha ConstructionLtd had liabilities of NT$2.07b due within 12 months, and liabilities of NT$10.3m due beyond 12 months. Offsetting these obligations, it had cash of NT$212.3m as well as receivables valued at NT$42.8m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by NT$1.83b.

Delpha ConstructionLtd has a market capitalization of NT$3.78b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. But we definitely want to keep our eyes open to indications that its debt is bringing too much risk. The balance sheet is clearly the area to focus on when you are analysing debt. But it is Delpha ConstructionLtd'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.

Over 12 months, Delpha ConstructionLtd made a loss at the EBIT level, and saw its revenue drop to NT$41m, which is a fall of 78%. That makes us nervous, to say the least.

Caveat Emptor

Not only did Delpha ConstructionLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). To be specific the EBIT loss came in at NT$67m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. Another cause for caution is that is bled NT$109m in negative free cash flow over the last twelve months. So to be blunt we think it is risky. 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. For instance, we've identified 3 warning signs for Delpha ConstructionLtd (2 don't sit too well with us) you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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