Health Check: How Prudently Does In the FLtd (KRX:014990) Use Debt?

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. We can see that In the F Co.,Ltd. (KRX:014990) does use debt in its business. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. 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, debt can be an important tool in businesses, particularly capital heavy businesses. The first step when considering a company's debt levels is to consider its cash and debt together.

See our latest analysis for In the FLtd

What Is In the FLtd's Debt?

The image below, which you can click on for greater detail, shows that at September 2020 In the FLtd had debt of ₩42.7b, up from ₩26.5b in one year. However, because it has a cash reserve of ₩12.9b, its net debt is less, at about ₩29.8b.

How Strong Is In the FLtd's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that In the FLtd had liabilities of ₩77.8b due within 12 months and liabilities of ₩25.5b due beyond that. On the other hand, it had cash of ₩12.9b and ₩12.1b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩78.2b.

This deficit is considerable relative to its market capitalization of ₩88.1b, so it does suggest shareholders should keep an eye on In the FLtd's use of debt. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. There's no doubt that we learn most about debt from the balance sheet. But you can't view debt in total isolation; since In the FLtd 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 In the FLtd had a loss before interest and tax, and actually shrunk its revenue by 16%, to ₩168b. We would much prefer see growth.

Caveat Emptor

While In the FLtd's falling revenue is about as heartwarming as a wet blanket, arguably its earnings before interest and tax (EBIT) loss is even less appealing. To be specific the EBIT loss came in at ₩8.8b. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. For example, we would not want to see a repeat of last year's loss of ₩11b. So to be blunt we do think it is risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. Take risks, for example - In the FLtd has 1 warning sign we think 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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