We Think FNS TECH (KOSDAQ:083500) Is Taking Some Risk With Its Debt

Some say volatility, rather than debt, is the best way to think about risk as an investor, but Warren Buffett famously said that '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 note that FNS TECH. Co., Ltd (KOSDAQ:083500) does have debt on its balance sheet. But is this debt a concern to shareholders?

What Risk Does Debt Bring?

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. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. 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. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

See our latest analysis for FNS TECH

How Much Debt Does FNS TECH Carry?

As you can see below, FNS TECH had ₩17.3b of debt at September 2023, down from ₩21.7b a year prior. But on the other hand it also has ₩24.1b in cash, leading to a ₩6.79b net cash position.

How Strong Is FNS TECH's Balance Sheet?

Zooming in on the latest balance sheet data, we can see that FNS TECH had liabilities of ₩24.6b due within 12 months and liabilities of ₩10.8b due beyond that. Offsetting these obligations, it had cash of ₩24.1b as well as receivables valued at ₩3.36b due within 12 months. So its liabilities total ₩7.95b more than the combination of its cash and short-term receivables.

Of course, FNS TECH has a market capitalization of ₩104.6b, so these liabilities are probably manageable. But there are sufficient liabilities that we would certainly recommend shareholders continue to monitor the balance sheet, going forward. While it does have liabilities worth noting, FNS TECH also has more cash than debt, so we're pretty confident it can manage its debt safely.

Importantly, FNS TECH's EBIT fell a jaw-dropping 91% in the last twelve months. If that earnings trend continues then paying off its debt will be about as easy as herding cats on to a roller coaster. There's no doubt that we learn most about debt from the balance sheet. But it is FNS TECH'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.

Finally, a company can only pay off debt with cold hard cash, not accounting profits. 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. Looking at the most recent three years, FNS TECH recorded free cash flow of 45% of its EBIT, which is weaker than we'd expect. That weak cash conversion makes it more difficult to handle indebtedness.

Summing Up

We could understand if investors are concerned about FNS TECH's liabilities, but we can be reassured by the fact it has has net cash of ₩6.79b. So although we see some areas for improvement, we're not too worried about FNS TECH's balance sheet. 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 FNS TECH has 3 warning signs (and 1 which is concerning) 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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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.