Health Check: How Prudently Does FNC ADD CULTURE (KOSDAQ:063440) Use 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, FNC ADD CULTURE. Co., Ltd. (KOSDAQ:063440) does carry debt. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, plenty of companies use debt to fund growth, without any negative consequences. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for FNC ADD CULTURE

What Is FNC ADD CULTURE's Net Debt?

The image below, which you can click on for greater detail, shows that FNC ADD CULTURE had debt of ₩4.22b at the end of December 2020, a reduction from ₩4.41b over a year. However, its balance sheet shows it holds ₩27.3b in cash, so it actually has ₩23.1b net cash.

A Look At FNC ADD CULTURE's Liabilities

Zooming in on the latest balance sheet data, we can see that FNC ADD CULTURE had liabilities of ₩9.35b due within 12 months and liabilities of ₩1.65b due beyond that. On the other hand, it had cash of ₩27.3b and ₩5.40b worth of receivables due within a year. So it actually has ₩21.7b more liquid assets than total liabilities.

This surplus suggests that FNC ADD CULTURE has a conservative balance sheet, and could probably eliminate its debt without much difficulty. Succinctly put, FNC ADD CULTURE boasts net cash, so it's fair to say it does not have a heavy debt load! There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since FNC ADD CULTURE will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year FNC ADD CULTURE had a loss before interest and tax, and actually shrunk its revenue by 21%, to ₩29b. That makes us nervous, to say the least.

So How Risky Is FNC ADD CULTURE?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And in the last year FNC ADD CULTURE had an earnings before interest and tax (EBIT) loss, truth be told. Indeed, in that time it burnt through ₩2.7b of cash and made a loss of ₩3.0b. Given it only has net cash of ₩23.1b, the company may need to raise more capital if it doesn't reach break-even soon. Even though its balance sheet seems sufficiently liquid, debt always makes us a little nervous if a company doesn't produce free cash flow regularly. 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. To that end, you should learn about the 2 warning signs we've spotted with FNC ADD CULTURE (including 1 which shouldn't be ignored) .

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. 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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