These 4 Measures Indicate That FNS TECH (KOSDAQ:083500) Is Using Debt Safely

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. Importantly, FNS TECH. Co., Ltd (KOSDAQ:083500) does carry debt. 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. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. 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.

See our latest analysis for FNS TECH

What Is FNS TECH's Net Debt?

The image below, which you can click on for greater detail, shows that at September 2024 FNS TECH had debt of ₩20.4b, up from ₩17.3b in one year. However, it does have ₩37.3b in cash offsetting this, leading to net cash of ₩16.8b.

How Healthy Is FNS TECH's Balance Sheet?

According to the last reported balance sheet, FNS TECH had liabilities of ₩49.9b due within 12 months, and liabilities of ₩18.3b due beyond 12 months. Offsetting this, it had ₩37.3b in cash and ₩6.92b in receivables that were due within 12 months. So its liabilities total ₩24.0b more than the combination of its cash and short-term receivables.

FNS TECH has a market capitalization of ₩67.1b, so it could very likely raise cash to ameliorate its balance sheet, if the need arose. However, it is still worthwhile taking a close look at its ability to pay off debt. Despite its noteworthy liabilities, FNS TECH boasts net cash, so it's fair to say it does not have a heavy debt load!

Even more impressive was the fact that FNS TECH grew its EBIT by 678% over twelve months. That boost will make it even easier to pay down debt going forward. 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 FNS TECH 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.

Finally, while the tax-man may adore accounting profits, lenders only accept cold hard cash. FNS TECH may have net cash on the balance sheet, but it is still interesting to look at how well the business converts its earnings before interest and tax (EBIT) to free cash flow, because that will influence both its need for, and its capacity to manage debt. Over the last three years, FNS TECH actually produced more free cash flow than EBIT. That sort of strong cash generation warms our hearts like a puppy in a bumblebee suit.

Summing Up

Although FNS TECH's balance sheet isn't particularly strong, due to the total liabilities, it is clearly positive to see that it has net cash of ₩16.8b. And it impressed us with free cash flow of -₩1.8b, being 121% of its EBIT. So is FNS TECH's debt a risk? It doesn't seem so to us. 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 instance, we've identified 3 warning signs for FNS TECH (2 can't be ignored) you should be aware of.

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.