We Think Creas F&CLtd (KOSDAQ:110790) Can Stay On Top Of Its Debt

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.' 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 Creas F&C Co.,Ltd (KOSDAQ:110790) makes use of debt. But should shareholders be worried about its use of debt?

Why Does Debt Bring Risk?

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, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for Creas F&CLtd

What Is Creas F&CLtd's Debt?

As you can see below, at the end of September 2020, Creas F&CLtd had ₩27.4b of debt, up from ₩19.5b a year ago. Click the image for more detail. However, its balance sheet shows it holds ₩54.4b in cash, so it actually has ₩27.0b net cash.

How Healthy Is Creas F&CLtd's Balance Sheet?

According to the last reported balance sheet, Creas F&CLtd had liabilities of ₩79.1b due within 12 months, and liabilities of ₩3.61b due beyond 12 months. Offsetting these obligations, it had cash of ₩54.4b as well as receivables valued at ₩32.1b due within 12 months. So it actually has ₩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 ₩242.8b 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. There's no doubt that we learn most about debt from the balance sheet. But it is Creas F&CLtd'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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 it is always sensible to investigate a company's debt, in this case Creas F&CLtd has ₩27.0b in net cash and a decent-looking balance sheet. 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. Case in point: We've spotted 1 warning sign for Creas F&CLtd you should be aware of.

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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