Is Fine Besteel (KRX:133820) A Risky Investment?

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. As with many other companies Fine Besteel Co., Ltd. (KRX:133820) makes use of debt. But is this debt a concern to shareholders?

When Is Debt A Problem?

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. If things get really bad, the lenders can take control of the business. 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. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

View our latest analysis for Fine Besteel

How Much Debt Does Fine Besteel Carry?

The image below, which you can click on for greater detail, shows that Fine Besteel had debt of ₩90.1b at the end of September 2020, a reduction from ₩100.7b over a year. And it doesn't have much cash, so its net debt is about the same.

How Healthy Is Fine Besteel's Balance Sheet?

According to the last reported balance sheet, Fine Besteel had liabilities of ₩95.6b due within 12 months, and liabilities of ₩7.67b due beyond 12 months. On the other hand, it had cash of ₩1.07b and ₩18.4b worth of receivables due within a year. So it has liabilities totalling ₩83.8b more than its cash and near-term receivables, combined.

When you consider that this deficiency exceeds the company's ₩73.0b market capitalization, you might well be inclined to review the balance sheet intently. In the scenario where the company had to clean up its balance sheet quickly, it seems likely shareholders would suffer extensive dilution. There's no doubt that we learn most about debt from the balance sheet. But it is Fine Besteel's earnings that will influence how the balance sheet holds up in the future. So if you're keen to discover more about its earnings, it might be worth checking out this graph of its long term earnings trend.

In the last year Fine Besteel had a loss before interest and tax, and actually shrunk its revenue by 26%, to ₩108b. That makes us nervous, to say the least.

Caveat Emptor

Not only did Fine Besteel's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Its EBIT loss was a whopping ₩8.7b. When we look at that alongside the significant liabilities, we're not particularly confident about the company. We'd want to see some strong near-term improvements before getting too interested in the stock. For example, we would not want to see a repeat of last year's loss of ₩11b. In the meantime, we consider the stock to be risky. 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 instance, we've identified 3 warning signs for Fine Besteel (2 are significant) 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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This article by Simply Wall St is general in nature. 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.
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