Does Creas F&CLtd (KOSDAQ:110790) Have A Healthy Balance Sheet?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' 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. We can see that Creas F&C Co.,Ltd (KOSDAQ:110790) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. 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.

Check out our latest analysis for Creas F&CLtd

What Is Creas F&CLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 Creas F&CLtd had debt of ₩27.4b, up from ₩19.5b in one year. However, it does have ₩54.4b in cash offsetting this, leading to net cash of ₩27.0b.

A Look At Creas F&CLtd's Liabilities

We can see from the most recent balance sheet that Creas F&CLtd had liabilities of ₩79.1b falling due within a year, and liabilities of ₩3.61b due beyond that. On the other hand, it had cash of ₩54.4b and ₩32.1b worth of receivables due within a year. So it can boast ₩3.76b more liquid assets than total liabilities.

This state of affairs indicates that Creas F&CLtd's balance sheet looks quite solid, as its total liabilities are just about equal to its liquid assets. So it's very unlikely that the ₩274.8b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that Creas F&CLtd has more cash than debt is arguably a good indication that it can manage its debt safely.

And we also note warmly that Creas F&CLtd grew its EBIT by 12% last year, making its debt load easier to handle. When analysing debt levels, the balance sheet is the obvious place to start. But it is Creas F&CLtd'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.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. Creas F&CLtd may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. In the last three years, Creas F&CLtd's free cash flow amounted to 25% of its EBIT, less than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing up

While we empathize with investors who find debt concerning, you should keep in mind that Creas F&CLtd has net cash of ₩27.0b, as well as more liquid assets than liabilities. On top of that, it increased its EBIT by 12% in the last twelve months. So we don't have any problem with Creas F&CLtd's use of debt. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - Creas F&CLtd has 1 warning sign we think you should be aware of.

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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