Is In the FLtd (KRX:014990) A Risky Investment?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' 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 In the F Co.,Ltd. (KRX:014990) does use debt in its business. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

View our latest analysis for In the FLtd

What Is In the FLtd's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2020 In the FLtd had ₩42.6b of debt, an increase on ₩26.5b, over one year. However, it does have ₩12.0b in cash offsetting this, leading to net debt of about ₩30.6b.

A Look At In the FLtd's Liabilities

Zooming in on the latest balance sheet data, we can see that In the FLtd had liabilities of ₩80.9b due within 12 months and liabilities of ₩16.6b due beyond that. On the other hand, it had cash of ₩12.0b and ₩13.3b worth of receivables due within a year. So its liabilities total ₩72.2b more than the combination of its cash and short-term receivables.

This is a mountain of leverage relative to its market capitalization of ₩80.4b. This suggests shareholders would be heavily diluted if the company needed to shore up its balance sheet in a hurry. When analysing debt levels, the balance sheet is the obvious place to start. 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.

Over 12 months, In the FLtd made a loss at the EBIT level, and saw its revenue drop to ₩153b, which is a fall of 25%. That makes us nervous, to say the least.

Caveat Emptor

Not only did In the FLtd's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost a very considerable ₩20b at the EBIT level. 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. Quite frankly we think the balance sheet is far from match-fit, although it could be improved with time. However, it doesn't help that it burned through ₩5.0b of cash over the last year. So in short it's a really risky stock. 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. For instance, we've identified 2 warning signs for In the FLtd (1 is concerning) you should be aware of.

If you're interested in investing in businesses that can grow profits without the burden of debt, then check out this free list of growing businesses that have net cash on the balance sheet.

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