Here's Why Fine Semitech (KOSDAQ:036810) Can Afford Some Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' 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. We can see that Fine Semitech Corp. (KOSDAQ:036810) does use debt in its business. But the real question is whether this debt is making the company risky.

Why Does Debt Bring Risk?

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. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. 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. 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.

See our latest analysis for Fine Semitech

What Is Fine Semitech's Debt?

The image below, which you can click on for greater detail, shows that at December 2023 Fine Semitech had debt of ₩127.4b, up from ₩106.8b in one year. However, it also had ₩28.8b in cash, and so its net debt is ₩98.6b.

How Strong Is Fine Semitech's Balance Sheet?

According to the last reported balance sheet, Fine Semitech had liabilities of ₩100.5b due within 12 months, and liabilities of ₩68.6b due beyond 12 months. Offsetting these obligations, it had cash of ₩28.8b as well as receivables valued at ₩30.9b due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by ₩109.4b.

Of course, Fine Semitech has a market capitalization of ₩644.7b, so these liabilities are probably manageable. Having said that, it's clear that we should continue to monitor its balance sheet, lest it change for the worse. 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 Fine Semitech 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 Fine Semitech had a loss before interest and tax, and actually shrunk its revenue by 10%, to ₩198b. We would much prefer see growth.

Caveat Emptor

Not only did Fine Semitech's revenue slip over the last twelve months, but it also produced negative earnings before interest and tax (EBIT). Indeed, it lost ₩11b at the EBIT level. 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. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through ₩23b of cash over the last year. So suffice it to say we do 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 example, we've discovered 2 warning signs for Fine Semitech (1 is potentially serious!) that you should be aware of before investing here.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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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.