We Think FNS TECH (KOSDAQ:083500) Can Manage Its Debt With Ease

Legendary fund manager Li Lu (who Charlie Munger backed) once said, '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. We note that FNS TECH. Co., Ltd (KOSDAQ:083500) does have debt on its balance sheet. But is this debt a concern to shareholders?

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. 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. Having said that, the most common situation is where a company manages its debt reasonably well - and to its own advantage. When we examine debt levels, we first consider both cash and debt levels, together.

See our latest analysis for FNS TECH

What Is FNS TECH's Debt?

As you can see below, at the end of September 2024, FNS TECH had ₩20.4b of debt, up from ₩17.3b a year ago. Click the image for more detail. However, it does have ₩37.3b in cash offsetting this, leading to net cash of ₩16.8b.

A Look At FNS TECH's Liabilities

We can see from the most recent balance sheet that FNS TECH had liabilities of ₩49.9b falling due within a year, and liabilities of ₩18.3b due beyond that. On the other hand, it had cash of ₩37.3b and ₩6.92b worth of receivables due within a year. So its liabilities total ₩24.0b more than the combination of its cash and short-term receivables.

This deficit isn't so bad because FNS TECH is worth ₩87.1b, and thus could probably raise enough capital to shore up its balance sheet, if the need arose. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. Despite its noteworthy liabilities, FNS TECH boasts net cash, so it's fair to say it does not have a heavy debt load!

Better yet, FNS TECH grew its EBIT by 678% last year, which is an impressive improvement. 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 it is FNS TECH's earnings that will influence how the balance sheet holds up in the future. 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, a company can only pay off debt with cold hard cash, not accounting profits. While FNS TECH has net cash on its balance sheet, it's still worth taking a look at its ability to convert earnings before interest and tax (EBIT) to free cash flow, to help us understand how quickly it is building (or eroding) that cash balance. Over the last three years, FNS TECH actually produced more free cash flow than EBIT. There's nothing better than incoming cash when it comes to staying in your lenders' good graces.

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. The cherry on top was that in converted 121% of that EBIT to free cash flow, bringing in -₩1.8b. 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. However, not all investment risk resides within the balance sheet - far from it. To that end, you should learn about the 4 warning signs we've spotted with FNS TECH (including 2 which are a bit unpleasant) .

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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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.