F&F (KRX:383220) Seems To Use Debt Quite Sensibly

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 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. We note that F&F Co., Ltd (KRX:383220) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. If things get really bad, the lenders can take control of the business. 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 step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for F&F

What Is F&F's Debt?

You can click the graphic below for the historical numbers, but it shows that F&F had ₩73.3b of debt in March 2024, down from ₩201.9b, one year before. However, its balance sheet shows it holds ₩348.4b in cash, so it actually has ₩275.1b net cash.

How Strong Is F&F's Balance Sheet?

The latest balance sheet data shows that F&F had liabilities of ₩517.5b due within a year, and liabilities of ₩190.2b falling due after that. On the other hand, it had cash of ₩348.4b and ₩103.0b worth of receivables due within a year. So it has liabilities totalling ₩256.3b more than its cash and near-term receivables, combined.

Since publicly traded F&F shares are worth a total of ₩2.14t, it seems unlikely that this level of liabilities would be a major threat. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. While it does have liabilities worth noting, F&F also has more cash than debt, so we're pretty confident it can manage its debt safely.

But the other side of the story is that F&F saw its EBIT decline by 2.2% over the last year. If earnings continue to decline at that rate the company may have increasing difficulty managing its debt load. 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. While F&F 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. During the last three years, F&F produced sturdy free cash flow equating to 69% of its EBIT, about what we'd expect. This cold hard cash means it can reduce its debt when it wants to.

Summing Up

Although F&F's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩275.1b. And it impressed us with free cash flow of ₩370b, being 69% of its EBIT. So we are not troubled with F&F's debt use. 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. These risks can be hard to spot. Every company has them, and we've spotted 2 warning signs for F&F you should know about.

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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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.