These 4 Measures Indicate That F&F Holdings (KRX:007700) Is Using Debt Extensively

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' So it might be obvious that you need to consider debt, when you think about how risky any given stock is, because too much debt can sink a company. As with many other companies F&F Holdings Co., Ltd. (KRX:007700) makes use of debt. But should shareholders be worried about its use of debt?

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What Risk Does Debt Bring?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

What Is F&F Holdings's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 F&F Holdings had ₩145.6b of debt, an increase on ₩42.5b, over one year. But it also has ₩167.6b in cash to offset that, meaning it has ₩22.0b net cash.

How Strong Is F&F Holdings' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that F&F Holdings had liabilities of ₩517.7b due within 12 months and liabilities of ₩145.6b due beyond that. Offsetting these obligations, it had cash of ₩167.6b as well as receivables valued at ₩152.7b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩343.0b.

This is a mountain of leverage relative to its market capitalization of ₩555.6b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. While it does have liabilities worth noting, F&F Holdings also has more cash than debt, so we're pretty confident it can manage its debt safely.

Check out our latest analysis for F&F Holdings

On the other hand, F&F Holdings's EBIT dived 18%, over the last year. If that rate of decline in earnings continues, the company could find itself in a tight spot. When analysing debt levels, the balance sheet is the obvious place to start. But you can't view debt in total isolation; since F&F Holdings will need earnings to service that debt. 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. While F&F Holdings has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Looking at the most recent three years, F&F Holdings recorded free cash flow of 44% of its EBIT, which is weaker than we'd expect. That's not great, when it comes to paying down debt.

Summing Up

While F&F Holdings does have more liabilities than liquid assets, it also has net cash of ₩22.0b. So although we see some areas for improvement, we're not too worried about F&F Holdings's balance sheet. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. For example - F&F Holdings 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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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. 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.