Is Fine Besteel (KRX:133820) Weighed On By Its Debt Load?

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 seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. Importantly, Fine Besteel Co., Ltd. (KRX:133820) does carry debt. But is this debt a concern to shareholders?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. If things get really bad, the lenders can take control of the business. However, a more frequent (but still costly) occurrence is where a company must issue shares at bargain-basement prices, permanently diluting shareholders, just to shore up its balance sheet. 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. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for Fine Besteel

How Much Debt Does Fine Besteel Carry?

You can click the graphic below for the historical numbers, but it shows that Fine Besteel had ₩92.4b of debt in December 2020, down from ₩98.3b, one year before. However, it does have ₩6.06b in cash offsetting this, leading to net debt of about ₩86.3b.

How Strong Is Fine Besteel's Balance Sheet?

According to the last reported balance sheet, Fine Besteel had liabilities of ₩95.9b due within 12 months, and liabilities of ₩5.51b due beyond 12 months. On the other hand, it had cash of ₩6.06b and ₩17.2b worth of receivables due within a year. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩78.2b.

This is a mountain of leverage relative to its market capitalization of ₩82.4b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. When analysing debt levels, the balance sheet is the obvious place to start. But it is Fine Besteel's earnings that will influence how the balance sheet holds up in the future. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Fine Besteel had a loss before interest and tax, and actually shrunk its revenue by 27%, to ₩99b. To be frank that doesn't bode well.

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 ₩13b. 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. For example, we would not want to see a repeat of last year's loss of ₩16b. In the meantime, we consider the stock very risky. The balance sheet is clearly the area to focus on when you are analysing debt. 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 3 warning signs for Fine Besteel (of which 2 shouldn't be ignored!) you should know about.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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