Finemedix (KOSDAQ:387570) Has Debt But No Earnings; Should You Worry?

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 Finemedix Co., Ltd. (KOSDAQ:387570) makes use of debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. Of course, the upside of debt is that it often represents cheap capital, especially when it replaces dilution in a company with the ability to reinvest at high rates of return. The first thing to do when considering how much debt a business uses is to look at its cash and debt together.

What Is Finemedix's Debt?

The image below, which you can click on for greater detail, shows that Finemedix had debt of ₩3.55b at the end of December 2024, a reduction from ₩3.92b over a year. However, it does have ₩10.4b in cash offsetting this, leading to net cash of ₩6.86b.

A Look At Finemedix's Liabilities

The latest balance sheet data shows that Finemedix had liabilities of ₩3.12b due within a year, and liabilities of ₩2.99b falling due after that. Offsetting these obligations, it had cash of ₩10.4b as well as receivables valued at ₩2.90b due within 12 months. So it can boast ₩7.20b more liquid assets than total liabilities.

This short term liquidity is a sign that Finemedix could probably pay off its debt with ease, as its balance sheet is far from stretched. Succinctly put, Finemedix boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Finemedix 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.

See our latest analysis for Finemedix

In the last year Finemedix's revenue was pretty flat, and it made a negative EBIT. While that's not too bad, we'd prefer see growth.

So How Risky Is Finemedix?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Finemedix lost money at the earnings before interest and tax (EBIT) line. Indeed, in that time it burnt through ₩425m of cash and made a loss of ₩24m. Given it only has net cash of ₩6.86b, the company may need to raise more capital if it doesn't reach break-even soon. Overall, its balance sheet doesn't seem overly risky, at the moment, but we're always cautious until we see the positive free cash flow. 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 Finemedix (of which 1 is a bit unpleasant!) you should know about.

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.