Is FutureChemLtd (KOSDAQ:220100) Using Debt In A Risky Way?

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.' 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. As with many other companies FutureChem Co.,Ltd (KOSDAQ:220100) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt A Problem?

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 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 thing to do when considering how much debt a business uses is to look at its cash and debt together.

See our latest analysis for FutureChemLtd

What Is FutureChemLtd's Net Debt?

The chart below, which you can click on for greater detail, shows that FutureChemLtd had ₩32.4b in debt in September 2020; about the same as the year before. However, its balance sheet shows it holds ₩46.6b in cash, so it actually has ₩14.2b net cash.

A Look At FutureChemLtd's Liabilities

The latest balance sheet data shows that FutureChemLtd had liabilities of ₩29.8b due within a year, and liabilities of ₩18.1b falling due after that. On the other hand, it had cash of ₩46.6b and ₩2.63b worth of receivables due within a year. So it actually has ₩1.31b more liquid assets than total liabilities.

Having regard to FutureChemLtd's size, it seems that its liquid assets are well balanced with its total liabilities. So it's very unlikely that the ₩242.1b company is short on cash, but still worth keeping an eye on the balance sheet. Simply put, the fact that FutureChemLtd has more cash than debt is arguably a good indication that it can manage its debt safely. 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 FutureChemLtd will need earnings to service that debt. 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 FutureChemLtd wasn't profitable at an EBIT level, but managed to grow its revenue by 59%, to ₩9.9b. With any luck the company will be able to grow its way to profitability.

So How Risky Is FutureChemLtd?

By their very nature companies that are losing money are more risky than those with a long history of profitability. And we do note that FutureChemLtd had an earnings before interest and tax (EBIT) loss, over the last year. Indeed, in that time it burnt through ₩7.2b of cash and made a loss of ₩9.1b. But the saving grace is the ₩14.2b on the balance sheet. That kitty means the company can keep spending for growth for at least two years, at current rates. With very solid revenue growth in the last year, FutureChemLtd may be on a path to profitability. Pre-profit companies are often risky, but they can also offer great rewards. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example FutureChemLtd has 2 warning signs (and 1 which can't be ignored) we think you should know about.

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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