Is FNC ADD CULTURE (KOSDAQ:063440) Using Debt In A Risky Way?

Warren Buffett famously said, '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 FNC ADD CULTURE. Co., Ltd. (KOSDAQ:063440) makes use of 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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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, 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 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 ₩4.27b at the end of September 2020, a reduction from ₩4.52b over a year. However, it does have ₩28.6b in cash offsetting this, leading to net cash of ₩24.3b.

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 ₩8.53b due within 12 months and liabilities of ₩2.36b due beyond that. On the other hand, it had cash of ₩28.6b and ₩3.65b worth of receivables due within a year. So it can boast ₩21.4b more liquid assets than total liabilities.

This surplus suggests that FNC ADD CULTURE is using debt in a way that is appears to be both safe and conservative. Due to its strong net asset position, it is not likely to face issues with its lenders. Simply put, the fact that FNC ADD CULTURE has more cash than debt is arguably a good indication that it can manage its debt safely. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, FNC ADD CULTURE made a loss at the EBIT level, and saw its revenue drop to ₩29b, which is a fall of 21%. To be frank that doesn't bode well.

So How Risky Is FNC ADD CULTURE?

Statistically speaking companies that lose money are riskier than those that make money. And we do note that FNC ADD CULTURE had an earnings before interest and tax (EBIT) loss, over the last year. And over the same period it saw negative free cash outflow of ₩887m and booked a ₩4.2b accounting loss. Given it only has net cash of ₩24.3b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - FNC ADD CULTURE has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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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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