Is Delpha ConstructionLtd (TPE:2530) Weighed On By Its Debt Load?

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. Importantly, Delpha Construction Co.,Ltd. (TPE:2530) does carry debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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, debt can be an important tool in businesses, particularly capital heavy businesses. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for Delpha ConstructionLtd

What Is Delpha ConstructionLtd's Debt?

As you can see below, at the end of December 2020, Delpha ConstructionLtd had NT$1.69b of debt, up from NT$1.51b a year ago. Click the image for more detail. However, it does have NT$1.90b in cash offsetting this, leading to net cash of NT$210.9m.

How Healthy Is Delpha ConstructionLtd's Balance Sheet?

We can see from the most recent balance sheet that Delpha ConstructionLtd had liabilities of NT$2.22b falling due within a year, and liabilities of NT$10.3m due beyond that. Offsetting these obligations, it had cash of NT$1.90b as well as receivables valued at NT$42.1m due within 12 months. So its liabilities total NT$290.4m more than the combination of its cash and short-term receivables.

Given Delpha ConstructionLtd has a market capitalization of NT$7.76b, it's hard to believe these liabilities pose much threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, Delpha ConstructionLtd also has more cash than debt, so we're pretty confident it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. But it is Delpha ConstructionLtd'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.

In the last year Delpha ConstructionLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 761%, to NT$87m. When it comes to revenue growth, that's like nailing the game winning 3-pointer!

So How Risky Is Delpha ConstructionLtd?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Delpha ConstructionLtd lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of NT$1.6b and booked a NT$90m accounting loss. While this does make the company a bit risky, it's important to remember it has net cash of NT$210.9m. That means it could keep spending at its current rate for more than two years. The good news for shareholders is that Delpha ConstructionLtd has dazzling revenue growth, so there's a very good chance it can boost its free cash flow in the years to come. High growth pre-profit companies may well be risky, but they can also offer great rewards. 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 example Delpha ConstructionLtd has 3 warning signs (and 2 which can't be ignored) we think you should know about.

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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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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