F&F (KRX:383220) Has A Pretty Healthy Balance Sheet

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.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that F&F Co., Ltd (KRX:383220) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt A Problem?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, debt can be an important tool in businesses, particularly capital heavy businesses. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

View our latest analysis for F&F

What Is F&F's Net Debt?

You can click the graphic below for the historical numbers, but it shows that F&F had ₩31.0b of debt in December 2023, down from ₩195.3b, one year before. However, it does have ₩241.1b in cash offsetting this, leading to net cash of ₩210.0b.

How Strong Is F&F's Balance Sheet?

The latest balance sheet data shows that F&F had liabilities of ₩486.9b due within a year, and liabilities of ₩200.5b falling due after that. Offsetting this, it had ₩241.1b in cash and ₩141.6b in receivables that were due within 12 months. So it has liabilities totalling ₩304.6b more than its cash and near-term receivables, combined.

Since publicly traded F&F shares are worth a total of ₩2.51t, it seems unlikely that this level of liabilities would be a major threat. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. Despite its noteworthy liabilities, F&F boasts net cash, so it's fair to say it does not have a heavy debt load!

Fortunately, F&F grew its EBIT by 4.1% in the last year, making that debt load look even more manageable. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately the future profitability of the business will decide if F&F can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

But our final consideration is also important, because a company cannot pay debt with paper profits; it needs cold hard cash. F&F 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. During the last three years, F&F produced sturdy free cash flow equating to 73% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

While F&F does have more liabilities than liquid assets, it also has net cash of ₩210.0b. The cherry on top was that in converted 73% of that EBIT to free cash flow, bringing in ₩403b. So is F&F's debt a risk? It doesn't seem so to us. 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, we've discovered 1 warning sign for F&F that you should be aware of before investing here.

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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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.