Is FNC ENTERTAINMENT (KOSDAQ:173940) Using Debt Sensibly?

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.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We can see that FNC ENTERTAINMENT Co., Ltd. (KOSDAQ:173940) does use debt in its business. But is this debt a concern to shareholders?

We've discovered 2 warning signs about FNC ENTERTAINMENT. View them for free.

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 common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

What Is FNC ENTERTAINMENT's Debt?

You can click the graphic below for the historical numbers, but it shows that as of December 2024 FNC ENTERTAINMENT had ₩11.9b of debt, an increase on ₩3.91b, over one year. However, its balance sheet shows it holds ₩37.3b in cash, so it actually has ₩25.4b net cash.

How Strong Is FNC ENTERTAINMENT's Balance Sheet?

The latest balance sheet data shows that FNC ENTERTAINMENT had liabilities of ₩58.7b due within a year, and liabilities of ₩28.9b falling due after that. On the other hand, it had cash of ₩37.3b and ₩9.49b worth of receivables due within a year. So it has liabilities totalling ₩40.7b more than its cash and near-term receivables, combined.

This is a mountain of leverage relative to its market capitalization of ₩48.8b. Should its lenders demand that it shore up the balance sheet, shareholders would likely face severe dilution. While it does have liabilities worth noting, FNC ENTERTAINMENT also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is FNC ENTERTAINMENT'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.

View our latest analysis for FNC ENTERTAINMENT

Over 12 months, FNC ENTERTAINMENT made a loss at the EBIT level, and saw its revenue drop to ₩86b, which is a fall of 4.3%. That's not what we would hope to see.

So How Risky Is FNC ENTERTAINMENT?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And the fact is that over the last twelve months FNC ENTERTAINMENT lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of ₩13b and booked a ₩6.9b accounting loss. But the saving grace is the ₩25.4b on the balance sheet. That means it could keep spending at its current rate for more than two years. Overall, we'd say the stock is a bit risky, and we're usually very cautious until we see positive free cash flow. There's no doubt that we learn most about debt from the balance sheet. However, not all investment risk resides within the balance sheet - far from it. For example FNC ENTERTAINMENT has 2 warning signs (and 1 which shouldn't be ignored) we think 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.